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Salary sacrifice

Your employer may offer you salary sacrifice as a way to lessen the impact of your pension contributions on your take-home pay. 

Salary sacrifice is not an effective way of saving for some people. If your employer offers a salary sacrifice arrangement, you should make sure you will benefit before signing up for it. You do not have to take part in it, even if your workplace scheme uses it. 

How it works

You give up part of your salary. The amount you give up is paid by your employer into your pension pot, and you receive a lower salary.

For example, you earn £30,000 a year and decide you want to give up £1,000 of your salary. Your new salary is £29,000. Your employer pays £1,000 to your pension pot, and also pays its own contribution.

Because you receive a lower salary, both you and your employer pay less national insurance contributions (NICs). Your employer may pay all or part of their NIC saving to your pension pot as well, but they don't have to do this.

How do I know if it is right for me?

Your employer should tell you in general terms how salary sacrifice might affect you, and whether or not they would pay some or all of the NICs they save to your pension pot. You can also ask your employer to carry out a calculation to show how salary sacrifice would affect your take home pay. 

Possible disadvantages

The result of sacrificing part of your salary is that you have a lower salary. Whether or not this puts you at a disadvantage depends on how your employer operates salary sacrifice, and the level of your salary. There are four areas where you may be disadvantaged.  

Life cover

Your employer may provide you with life cover, which is usually worked out as a multiple of your salary. Your employer can choose whether to use your pre-sacrifice salary or your salary after salary sacrifice.

Refund of contributions

Some workplace pension schemes offer you a refund of your own contributions if you leave before you have been in the scheme for two years. Under salary sacrifice, you are not directly paying contributions so there are no contributions to be refunded.

Getting a mortgage

Mortgage lenders usually calculate how much you can borrow as a multiple of your salary. Your employer can choose whether to use your pre-sacrifice salary or your salary after salary sacrifice, when they give you a mortgage reference.

State benefits

Your entitlement to some state benefits, such as Statutory Maternity Pay (SMP) and the state second pension (S2P) may be affected if your salary falls below the level at which you pay NICs. Your employer should be able to tell you whether or not you will be affected in this way. You can also find helpful information at www.gov.uk

Can my employer cancel salary sacrifice?

Salary sacrifice is a voluntary scheme. Your employer can stop offering it at any time.

If it forms part of your contract of employment, however, your employer may have to change your contract before it can stop offering salary sacrifice. 

For more information

Salary sacrifice is regulated by HM Revenue and Customs. You can find more information and guides on their website: www.hmrc.gov.uk/specialist/salary_sacrifice.htm

The guides go into more detail about the effects of salary sacrifice on state benefits such as maternity pay, the minimum wage and tax credits.

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