sacrifice. Salary sacrifice for pension benefits. This fact sheet accompanies the twenty-sixth episode of. Pensions in 3
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Salary sacrifice
Salary sacrifice for pension benefits This fact sheet accompanies the twenty-sixth episode of
the employer pays an equal amount to the
Pensions in 30 Podcasts and provides an overview of salary
pension scheme as an employer contribution.
sacrifice for pension benefits. This is a series of 30 podcasts covering some of the most
Salary sacrifice results in cost savings on National Insurance.
important and relevant issues in pensions today. It is brought to you by the Pensions team at Wragge Lawrence Graham &
Co.
To introduce a salary sacrifice arrangement an employer needs to vary the terms of the employee's contract of employment.
This series has been created to provide an overview of these subjects for anyone who is new to pensions, for those who
As salary sacrifice involves a reduction to the
deal with pensions at work or for people with some experience
employee's salary, it could have some
but who want a high level refresher.
disadvantages (though most of these can be avoided if the arrangement is set up carefully).
We've put together additional resources, including the podcast of this episode, at:
What is it?
www.wragge-law.com/pensionpodcasts
A salary sacrifice arrangement is a contractual agreement between an employer and an employee, under which the
You'll also be able to download all of our other pension
employee agrees to give up part of their cash salary in return
podcasts and find links to the team's latest alerts, briefings and
for a non-cash benefit.
webinars. In a pensions context, a salary sacrifice normally involves Key points
employees agreeing to accept a reduced salary in exchange for pension benefits.
Under a pensions salary sacrifice arrangement an employee gives up part of their cash salary in
Typically, the employee’s salary is reduced by the amount that
return for pension benefits.
they were previously paying as employee contributions to a pension scheme. Instead, the employer will agree to pay an
Typically the employee's salary is reduced by the
equal amount to the pension scheme as an employer
amount that they were previously paying as
contribution.
employee contributions to a pension scheme and
Why do it?
Are there any disadvantages?
The reason for doing this is that it saves money. If the
Salary sacrifice involves a reduction in the employee’s salary,
employer pays salary to the employee, which is then paid over
which could have some disadvantages. However, most of
to the pension scheme, both the employer and the employee
these can be avoided if the arrangement is set up carefully:
will pay National Insurance on that salary.
A salary sacrifice arrangement should not be
However, no National Insurance is payable on employer
offered to employees if it would reduce their
contributions to a pension scheme. So if the employer pays
earnings below the National Minimum Wage.
the pension contributions instead of the employee, both the
Also, if entering into the arrangement would cause
employer and the employee save National Insurance.
an employee’s earnings to fall below the Lower Earnings Limit, they could lose entitlement to
How does it work?
certain State benefits, e.g. statutory sick pay. Employers would usually exclude all such
To introduce a salary sacrifice arrangement, an employer will
employees from the arrangement.
need to vary the terms of the employee’s contract of employment.
If the employee is in a defined benefit pension scheme which calculates benefits by reference to
In some circumstances this will involve a consultation exercise,
salary, a reduced salary could mean reduced
and obtaining the employee’s agreement (either express, or
pension benefits. It could also mean a reduction
implied if employees are offered the option to opt-out, and do
to contractual benefits which are based on salary,
not choose to do so).
such as sick pay. However, employers will normally avoid this problem by agreeing to base
A good communication exercise is essential so that employees
these benefits on a “notional salary” which
can make an informed choice.
includes the sacrificed salary.
The sacrifice will only work if the employee has agreed to give
Where an employee leaves an occupational
up the salary in advance. Normally, it is also put in place for a
pension scheme within the time period specified
minimum period (e.g. a year), as it will be ineffective if the
by law, they may be entitled to a refund of
employee has the right to revert back to the higher salary at
employee contributions. However, employer
any time.
contributions (as there are no employee contributions under salary sacrifice) cannot be
The exception is where an employee is automatically enrolled
refunded in these circumstances without tax
into a pension arrangement which uses salary sacrifice.
penalties, so an occupational pension scheme
HMRC has confirmed that, in this situation, if the employee
would not normally refund contributions paid
opts out of the pension arrangement, they can also end the
under a salary sacrifice arrangement. However,
salary sacrifice.
some employers may be willing to offer an equivalent contractual payment instead.
An employer can ask HMRC to review a salary sacrifice arrangement, and confirm that it is effective. However, HMRC
Finally, a reduced salary could impact on
will not comment on a proposal, only on an arrangement that
borrowing, e.g. the maximum mortgage available
has already been put in place.
to the employee.
Reviewed as up to date to March 2015
More information Find out more about our Pension team at www.wragge-law.com/services/pensions. You can listen to or download the other episodes and get additional material at www.wragge-law.com/pensionpodcasts. You can also stay up to date with the latest pension developments at www.wragge-law.com/insights.
