Making a decision on salary sacrifice
A salary sacrifice arrangement allows an individual to forsake part of their salary in exchange for increased benefits by their employer.
This reduces the income tax liability and National Insurance Contributions for the individual and allows the employer to reduce National Insurance Contributions.
It is an HMRC and Government approved strategy to encourage pension saving.
Salary sacrifice is a useful financial planning tool for both employees and employers.
By agreeing to sacrifice part of a salary, employees can avail of useful benefits from the company such as increased pension contributions, childcare vouchers, cycle to work schemes, car parking, or even a low emission company car.
Typically though, salary sacrifice agreements utilise the method of reducing salary in exchange for an increased employer pension contribution.
Let's look at the example of Susan who works in the charity sector in Belfast.
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She is paid an annual salary of £24,000 in the 2019/2020 tax year.
Susan is married to Dermot who works in IT and earns £140,000 a year.
Dermot's wage more than covers all household expenditure and Susan's income is considered surplus to their needs.
Before salary sacrifice:
Susan makes a personal contribution of £960 (net) a year into her pension which is grossed up to £1,200 after the Government's tax relief of 20%. Her take home pay after tax, National Insurance and pension contributions is £18,896.
After salary sacrifice:
Susan agrees to give up £1,412 of her gross salary in exchange for an increased employer pension contribution of £1,412. So Susan's gross salary is £22,588 and she pays £3,693 in income tax and National Insurance. She ceases paying a personal pension contribution and her employer pays the £1,412 into her pension instead. Susan still takes home £18,896 but had increased her pension contributions.
The employer has also decreased their National Insurance liability by reducing an employee's income. For employees, there are clear benefits to utilising salary sacrifice but individuals need to be aware that by reducing their salary this may affect their ability to secure the mortgage they require, reduce the death benefit they are entitled to if linked to salary, or impact statutory benefits such as maternity/paternity pay.
For employers, the cost and effort of organising a company-wide salary sacrifice scheme may not be viable for just a few employees, but when you get up to 100 employees or beyond, the savings can be very significant.
The decision on whether offering such an arrangement is suitable will always be specific to each employer and their staff, so you should speak to an adviser on the subject to fully understand the implications.
North Financial Management LLP is a chartered financial planning practice, based in Ballyhackamore, with clients across NI and the rest of the UK. Led by Richard Schwartz, they specialise in corporate financial planning, and have experience in assisting companies looking to engage with salary sacrifice arrangements, so if you wish to explore this, or any other financial planning strategy, please contact North at firstname.lastname@example.org or call 028 9047 2228.
- North Financial Management LLP is an appointed representative of Network Direct Limited which is authorised and regulated by the Financial Conduct Authority. North Financial Management Limited Liability Partnership is registered in Northern Ireland Number NC000563. FCA Number: 517275