Wednesday 10th March, 2021
It might sound a bit funny to take a salary sacrifice but it can actually lead to significant savings. Salary sacrifice is when you agree to swap part of your on-paper salary and instead have your employer pay the amount directly into your pension.
As national insurance tax is calculated based on your salary before any deductions are taken, the reduced salary means you pay less national insurance. This means that your take home pay is actually more than if you paid your pension contribution separately!
A basic worked example:
Rachel earns £40,000 per year. Her personal contributions to her Penfold Workplace Pension are 5% (£2000) and her employer contributes 3% (£1200). Her employer offers her salary sacrifice where they will pay £2000 into her pension instead of her contributions and she will “reduce” her salary by £2000.
Total employer benefit = £276
Total benefit to Rachel is = £240
These savings typically increase as salaries increase! You can use our calculator here to experiment with different salaries and of course for employers this saving is multiple by the number of people involved in salary sacrifice.
There are a lot of good reasons to choose to use salary sacrifice:
There are also other considerations for salary sacrifice. Anything that might be linked to your salary could be affected this can include:
Penfold can set-up salary sacrifice pensions in under 10 minutes through your employer. Using Penfold you can find and consolidate all your existing pensions and receive employer contributions in one place. If you’re interested in finding out more about Penfold’s salary sacrifice scheme get in touch here.
Please note: tax benefits are dependent on personal circumstances. The examples used here are illustrative not guaranteed and may be subject to change. This article is not intended as financial advice.