Salary Sacrifice Pension Advantages Disadvantages
Published / Last Updated on 29/10/2014
Video explains the advantages and disadvantages of salary sacrifice in connection with pension contributions.
Transcript:
“Hello there. The subject for this video is salary sacrifice. What is salary sacrifice?
Firstly let me explain the fundamentals of pension contributions. In very simplistic terms, if you personally pay into a pension scheme you receive tax relief. That tax relief will either be granted at source so you pay in £80 into a pension and it gets automatically topped up to £100. That’s 20% basic relief. If you're a higher rate taxpayer you will receive a further tax relief by a tax refund for the other 20%, if you're a 40% taxpayer.
Moving that on, if you pay into your pension scheme, [if] you personally have deductions from your salary at work, so you get your pay and then they knock off a pension contribution e.g. £10, £20, £30 £50 a month whatever it might be. Sometimes, that is deducted from your pay before you are taxed so that's where you instantly receive tax relief and that's that by payroll deduction if you got a company pension scheme of some sort.
In addition, your employer may make pension contributions on your behalf. Now a pension contribution is not deemed as a taxable ‘benefit in kind’. So what I mean by that is let’s say your employer pays £100 a month into a pension scheme for you:
- They haven’t paid you as much because it's gone in as pension so there is no employer's National Insurance contribution required and approximately that's about 13% in terms of national insurance saved and then
- The employer can write off that pension contribution as an expense against their tax liability e.g. a limited company, if you are employed by a limited company and they pay into your pension. That's a legitimate are employer's expense and they offset it against the corporation tax bill.
Now moving to the subject of the video, ‘salary sacrifice’ what a lot of employers are looking at now is they come to you and they say: “would you like to reduce your salary marginally?” And have that amount that you had, let say you said: “yes, I'm prepared to accept £100 per month less in pay” and that can then go in as a pension contribution by the employer. So you haven’t made a contribution, your employer is technically making the contribution so they've reduced your wages by £100 a month.
That means you pay less tax, National Insurance etc. and then you employer says: “well I haven’t paid them £100 a month salary, I'm now paying that extra £100 a month into a pension.” So for the employer the expenses are still the same. You’ve still had £100 a month go to your pension but additionally the employer has saved employers national insurance. So sometimes what employers do is they say: “are you prepared to sacrifice your salary? Reduce your salary, we’ll pay into a pension pot” and they give you a little bit of an extra bonus which is, they might give you an extra 10 or 13%: that national insurance saving.
So some employers operate that model of salary sacrifice that's all well and good but that then becomes:
You've reduced your salary so your employer's bills are being reduced but then they then pay the extra into a pension scheme for you and they could be saving national insurance contributions.
So, very popular and a nice way for you to do retirement planning and increase the overall amount going into your pension fund.
But there is a downside to this and the downside is: you've reduced your salary.
By reducing your salary if you then want a mortgage you earn less. If you're earning less you can borrow less, on the affordability test for a mortgage, you may not be able to borrow as much. If you need a loan or other things you may not be able to afford as much.
When we’re looking at other elements, for example: by reducing your income, particularly at a lower level, part-time workers etc. That may then be affecting your overall national insurance record because you pay less National Insurance.
What’s that going to do for the state pension?
What’s that going to do for other benefits?
What’s that going to do the statutory sick pay?
What’s that going to do for maternity pay?
So it does have an impact.
The positive side of salary sacrifice, you giving up salary means you may get more going into your pension paid by the employer but on the other side it's
- You're potentially reducing your borrowing capacity if you want to borrow for mortgage loans or something like that
- You’re potentially reducing some state benefits be it statutory maternity pay, be it statutory sick pay ets.
So be aware salary sacrifice is a good thing, there are fantastic opportunities for you to increase pension contributions if you negotiate with your employer but there is also a downside be it potential loss of benefits etc. Thanks very much for watching.”
