Salary sacrifice: Boosting your take-home pay without the awkward pay rise conversation
October 4, 2017
Salary sacrifice. Many have heard of it but many do not seem too interested in a ‘benefit’ which, as it says on the tin, involves sacrificing your salary. This is the particularly the case for employees who are hoping to boost their pay.
Funnily enough, however, salary ‘sacrifice’ can do exactly that; boost your take-home pay.
Perhaps it is an innocent marketing blunder on the part of HMRC (or maybe an intentional one given what salary sacrifice entails!) but, in almost all instances, an employee’s take-home pay after salary sacrifice is either unchanged or slightly higher.
The way it works is that an employee gives up their right to part of their salary in exchange for an employer pension contribution. The amount ‘sacrificed’ is essentially treated as having never been earned and therefore both the employee and employer will pay reduced National Insurance contributions (NICs). The employee will pay no income tax on the amount of pay forfeited.
These combined savings have the impact of ‘enhancing’ pension provision, in one of two ways:
- Equivalent level of pension contributions can be made at lower cost, boosting take-home pay for the employee, or;
- Larger pension contributions can be made by the employer at no extra cost, as NIC savings can be recycled back into an employee’s pension.
There is also the secondary benefit that a reduced salary may increase an individual’s entitlement to certain State benefits, as well as reducing earnings to a level that they no longer obliged to pay certain tax charges.
Of course, as with everything, there are pitfalls to salary sacrifice which need to be considered to determine whether it is right for you. These include, but are not restricted to, the following:
- A reduced headline salary may incumber the employee’s borrowing capacity for the purposes of mortgages or loans.
- Benefits payable under earnings-linked protection arrangements, such as income protection and death in service cover, could be reduced as a result (albeit there are some ways around this).
- If you are in receipt of State benefits (e.g. statutory maternity pay), you should check whether these would be reduced or removed as a result of a reduction in salary.
- Certain pension schemes may not facilitate a refund of pension contributions made through salary sacrifice to individuals who cease to members of the pension scheme in the first two years.
- High earners who had already entered into salary sacrifice arrangements before 8 July 2015 must also be careful, as making adjustments to existing agreements could potentially restrict the amount that you can pay into pensions in future tax years.
In all instances, advice should be sought to determine whether entering into an employer’s salary sacrifice arrangement is the right course of action.
Please note that the information provided in this article is in no way intended as advice and is provided for information purposes only.