Your employer may offer you salary sacrifice as a way to minimise the impact of your pension contributions on your take-home pay.
Essentially, you give up part of your salary which is then paid by your employer into your pension pot, and you receive a lower salary.
For example, you earn £20,000 a year and decide you want to give up £1,000 of your salary. Your new salary is £19,000. Your employer then pays £1,000 to your pension pot.
Because you receive a lower salary, both you and your employer pay less national insurance contributions (NICs). Your employer may pay all or part of their NIC saving to your pension pot as well, but they don't have to do this.
Salary sacrifice is not always an effective way of saving for some people. If your employer offers a salary sacrifice arrangement, you should make sure you are fully aware of the implications before signing up for it. In particular, pay close attention to what would income be reported to lenders and the impact on state benefit entitlements. You do not have to take part in it, even if your workplace scheme uses it.
If you would like to discuss the tax implications of salary sacrifice in more detail, you should ask your employer for more information or ask them to calculate an estimate of the effect of the salary sacrifice on your take home pay.
By Jo Nockels
Disclaimer: Advice shared in this blog is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this forum, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.