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What is Salary Sacrifice? Calculate how much you could save with Salary Sacrifice!

Murray Humphrey
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!

How much could employers and employees save?

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.

Should I take salary sacrifice?

There are a lot of good reasons to choose to use salary sacrifice:

  • Clear financial savings for the employee as illustrated above and in the calculator.
  • Also clear financial savings for the employer, often this saving can be shared with employees.
  • As the money is paid into your pension before any income tax is paid you receive full tax relief on any contributions; you don’t have to complete a self assessment tax claim or wait for tax refunds.

There are also other considerations for salary sacrifice. Anything that might be linked to your salary could be affected this can include:

  • Life cover; which is often a multiple of your salary.
  • Statutory maternity pay is often based on your average weekly earnings so could be affected.
  • Any loan or mortgage applications could be related to your salary. Often an employer can show your original salary and explain the reduced salary to the lender but it’s important to check with any lenders and your employer first.

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.

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