Overview of salary sacrifice
What is Salary Sacrifice?
A salary sacrifice scheme allows employees to give up part of their salary in return for certain benefits such as additional pension contributions, Give As You Earn (GAYE), Tusker (car scheme) and the new Workplace Nursery benefit.
The idea behind these schemes are quite simple. You give up part of your gross salary or bonus and in return, your employer gives you a non-cash benefit, such as a car (through Tusker) or additional pension contributions.
You may pay less income tax and national insurance (NI) as a result of this gross deduction from your salary. That’s because your contractual salary is less - you’ve given some of it up for the benefit.
Here's an example of how the saving works
Employee A earns £45,000 per year. In April 2023, they decide to make an employee pension contribution through their employer’s salary sacrifice scheme. They chose to sacrifice £100 a month over 12 months. The gross amount is taken from their salary before they pay income tax and NI. Their salary is reduced to £43,800 (£45,000 - £1,200). Their income tax and NI is calculated based on that reduced amount;
- Earning £45,000, they would pay £6,480 in income tax and £3,890 NI.
- Earning £43,800, they would pay £6,242 in income tax and £3,746 NI.
- So overall, they would save £238 in income tax and £144 in NI, a total of £382.
Employer NI Savings into your Pension
A business also saves on its own NI contributions when paying your gross salary if you partake in a salary sacrifice scheme. This saving may be passed on to you as an additional saving, though this is down to the particulars of each agreement (highlighted in this document). Where applicable, we will provide you with the full employer NI saving as an uplift to your pension (13.8%) based on the salary sacrifice you make.
In Employee A’s example, as they are sacrificing £1,200 into their pension scheme, we will also contribute an additional £165.60 (£1,200 x 13.8%) in their pension also from the 13.8% employer NI savings they make. Thereby a total of £1,365.60 (£1,200 + £165.60) will be placed into Employee A’s pension annually.