Gad Harari | Friday 28th April, 2023
The best way to understand how salary sacrifice can save employees and employers money is with real word examples. In this article we'll show how setting up a salary sacrifice pension scheme benefits both by reducing National Insurance.
For our examples we're using a rounded UK average employee salary of £40,000. This is based on information published by The Office for National Statistics (ONS) on average UK salary. The most recent analysis shows mean average salary in the UK in 2020 was £38,600 for full-time employees.
Our pension salary sacrifice examples show two ways to treat the savings made after implementation:
In both scenarios the employer also makes a saving on their National Insurance contributions. These examples show the employer savings for one employee but they scale in line with your company size. Larger businesses can make bigger savings.
Our first example is based on the rounded average UK salary of £40,000 and legal minimum auto enrolment pension contributions.
The minimum auto enrolment contribution to an employee’s pension savings is 8% of qualifying earnings. Employers must pay at least 3% and the employee the remaining 5%.
Qualifying earnings include salary, wages, commission, bonuses, overtime, statutory sick pay and statutory parental leave pay (maternity, paternity and adoption pay).
Note how the employees' National Insurance is based on their taxable income which is calculated before their pension contribution of £2,000.
Note how the employers' National Insurance is based on the employee's gross salary.
The employee sacrifices £2,000 from their gross salary, which they previously paid into their pension. This lowers their NI contribution and increases their take home pay.
The employer pays the full pension contribution which previously included an employee contribution. This contribution is made before the gross salary calculation and therefore lowers the employer NI contribution. The result is that the employer saves money.
Note how the employee further sacrifices their gross salary to match their pre-salary sacrifice take home pay. In turn this further reduces their taxable income and their NI contribution. With this salary sacrifice arrangement an increased their employer pension contribution takes place of the previous saving.
Note how gross salary is further reduced meaning lower NI contributions and a greater reduction in the total employer cost. The Salary Sacrifice Employer Pension Contribution is further increased.
An employee may like to increase their auto enrolment pension contributions above the minimum threshold. Many employers also match their employee's workplace pension contributions so both are adding the same percentage.
For these examples we'll continue to use our rounded UK average salary of £40,000. Instead of the minimum contributions we'll use an employee contribution of 8% which is matched by the employer.
Compared to the previous pre-salary sacrifice example the employee pension contribution has increased by £1,200 to £3,200.
Compared to the previous pre-salary sacrifice example, employer pension contributions have increased by £2,000 to £3,200 to match the employee.
The employee sacrifices £3,200 from their gross salary, which they previously paid into their pension. The increase in take home pay is higher than the previous example as the savings scale up with higher contributions.
The employer pays the full pension contribution which previously included an employee contribution. This contribution is made before the gross salary calculation and therefore lowers the employer NI contribution. Like the employee, the employer saves more money when pension contributions are higher compared to the pre-salary sacrifice arrangement.
The employee agrees to reduce their gross salary in order to match their pre-salary sacrifice take home pay. In turn this further reduces their taxable income and their NI contribution. With this salary sacrifice arrangement an increased employer pension contribution takes place of the previous saving.
The further reduced gross salary results in lower NI contributions and a greater reduction in the total employer cost. The salary sacrifice employer pension contribution is further increased meaning the employee saves more for their retirement.
For a bespoke example based on your business use our salary sacrifice pension calculator. You'll see how much businesses and employees can save by switching to a more tax efficient pension scheme.
Speak to a Penfold salary sacrifice expert. A member of our team can produce a free, custom analysis on the savings your business could make.
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