Ask the Expert: Cornwall Payroll

What is Salary Sacrifice Pension? We ask Cornwall Payroll MD, Tim Wilkins, to explain.

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Also known as ‘Salary Exchange,’ Salary Sacrifice is an alternative arrangement for making pension contributions. An employee agrees to give up part of their salary, equal to their pension contributions (5% is the standard amount) and in return this reduces the amount of tax and NI payable by the employee.

Because the employee’s salary has been reduced, they will pay less tax and NI. Employers will also pay less Employer NI contributions on the reduced salary. The employer can then choose to pass this saving on to the employee by increasing the pension contribution by this amount.

Higher rate taxpayers will benefit the most and will also receive instant tax relief on their pension contributions, so no longer need to claim back the additional tax relief via self-assessment.

An Example of savings based on a salary of £30k per year-

  • The annual salary would be reduced to £28.5k and the employee would receive £120 extra net pay per year (based on a standard tax code).
  • The employer would save £207 per year in Employer NIC (£1.5k pension contribution x 13.8%).
  • An employee earning a salary of £60k per year would receive £660 extra net pay. The employer would save £414 per year in Employer NIC.

Disadvantages? You won’t be able to offer Salary Sacrifice if it reduces an employee’s pay below the national minimum wage. For part time workers, this could reduce the level at which they pay NI, so may affect entitlement to state benefits.

Employee contracts would need to be revised, so you would need to seek specialist advice about this.

www.cornwallpayroll.co.uk

01872 306412

This article first appeared in the July/August issue of Business Cornwall magazine.