Cutting an employee’s earnings usually means they’ll pay less income tax and National Insurance (NI) than before.
Pension contributions funded by the sacrifice are treated as employer contributions. Using an effective salary or bonus sacrifice arrangement to fund an employee’s pension, rather than the employee paying pension contributions from their salary, can produce significant financial benefits for both the employee and employer – although there can also be drawbacks in some circumstances.
Cutting an employee’s earnings usually means they’ll pay less income tax and National Insurance (NI) than before.
Because employee pension contributions qualify for tax relief anyway, using salary or bonus sacrifice to fund an employer pension contribution doesn’t produce an additional income tax saving. However:
With the Scottish Government introducing new income tax rates and bands on 6 April 2018 – the overall effect of salary sacrifice for Scottish taxpayers may differ from taxpayers in the rest of the UK.
As National Insurance limits are set by the UK Government – aligned with the UK’s higher rate tax threshold – Scottish taxpayers will be effectively taxed at 53% on earnings between £43,430 and £46,350 (compared to 32% for their UK counterpart) in 2018/19. Using salary sacrifice, on these earnings, is one way of immediately benefitting from the effect of higher rate tax relief and the NI saving.
Cutting an employee’s earnings usually means the employer will pay less NI than before.
Consider an employee earning £25,000 for the tax year 2017/18, who wants to contribute £100 a month (gross) to his SIPP. Table 1 below shows three different ways of funding the SIPP contribution and how the employee can benefit by using salary sacrifice.
Table 2 shows the employer’s position for each of the three options and the amount of employer NI that can be saved.
As can be seen from the above, when the employee sacrifices some salary the employer saves NI, which reduces the net cost of the employee’s remuneration package. If the employer is willing to maintain the overall value of the employee’s package, it can pay the amount of NI saved into the pension arrangement – thus increasing the effectiveness of the sacrifice.
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