Using a Pension Salary Sacrifice Arrangement to save tax

With the increase in National Insurance rates for businesses and employees, up by 1.25% from 1 April 2022, you may want to consider making a salary sacrifice arrangement, whether you are an employer or an employee.

Here’s our quick guide to what it means.

What is Salary Sacrifice?

Salary sacrifice is a HMRC approved deduction from a taxpayer’s salary which creates PAYE and National Insurance (N.I) savings.

What can be deducted as a salary sacrifice?

As there are PAYE and NI savings, only limited deductions are allowed by HMRC, these include Workplace Nurseries, Cycle to work schemes and payments into pension schemes

Why consider Salary Sacrifice?

From April 2022, the government have introduced a 1.25% increase in both employee and employer N.I rates. The employers NI rate will increase to 15.05% and the employees NI rate will increase 13.25%. By switching to a salary sacrifice pension scheme the company and the employees will save N.I. This will help negate some of the increase of NI for employees and help save Employers NI for the company.

How does it work in practice?

Currently the employee pension payments are taken from their net pay and paid to the pension provider with no tax relief at source

Under Salary sacrifice, the gross pay is reduced by the pension contribution, meaning that adjusted net pay is lower and therefore NI is saved each month for both the company and the employees.

The company then pays across the full pension amount to the provider as an employer contribution so that the same amount of money is paid into the pension pot each month. The employee therefore receives the same amount into the pension scheme but an increased amount in the pay due to the NI saving.

How is salary sacrifice shown?

The sacrificed amount is shown as a deduction made before PAYE and NICs is applied. This format gives the impression that the employee is entitled to the former (higher) level of salary and has simply applied a sum to reimburse the employer for the provision of a benefit

Who will benefit?

Any employee who is paid above the primary NI threshold will benefit from the switch to salary sacrifice for their pension contributions.

Examples of savings for the company and employees: