Salary sacrifice arrangements

A salary sacrifice arrangement is a tax-efficient way to arrange contributions to your workplace pension, enabling you and your employees to pay lower National Insurance contributions. The National Insurance savings can be significant for employers.

We set up every workplace pension with salary sacrifice capability, so you can use it from the beginning or introduce it at a later date.

How salary sacrifice works

Employees agree to give up (sacrifice) part of their salary in return for a benefit – in this case, pension contributions.

  • As the employer, you reduce your employees’ salary by the amount of their pension contributions.
  • You then pay an amount equal to their pension contributions, plus your contributions, to their workplace pension savings.
  • As a result, you and your employees make savings, because you pay less National Insurance on the lower salaries.

Ways to use the savings

You can set up your salary sacrifice arrangement so that:

  • your employees receive the National Insurance saving with their pay – making their net pay a little higher – or
  •  the National Insurance saving goes into their pension, giving them a larger pension contribution for the same amount of money.

Some employers also put some or all the money they’ve saved on National Insurance into their pension scheme. You may want to consider this as an incentive for employees to stay in your workplace pension.

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Recording contributions

We treat all contributions paid to us through a salary sacrifice arrangement as ‘employer only’.

This means you’ll need to list salary sacrifice contributions on behalf of your employees in the Employer Contribution column of your payroll data file, along with your own employer contributions.

If you think you’ve made a mistake calculating contributions, contact The Pensions Regulator for guidance.

Fluctuating earnings

If your employees have fluctuating earnings, their actual pay may fall significantly from one pay period to another.

There may be times when you cannot collect the usual amount to be paid from your employees’ salaries.

However, you’re still required to pay the minimum contribution to the Scheme on your employees’ behalf, through the salary sacrifice arrangement.

Salary sacrifice and earnings-related payments

You may decide to calculate earnings-related payments, such as pay rises and overtime rates and pay rises, on:

  • the pre-sacrifice ‘notional’ salary, or
  • the reduced post-sacrifice salary.

You’ll need to tell your employees which one you use.

You’ll also need to decide whether you use notional salary or post-sacrifice salary when giving employees a salary figure to quote for a mortgage or loan.

Salary sacrifice is a contractual agreement

Salary sacrifice involves a change to an employee’s contract of employment. When you set up a salary sacrifice arrangement your existing employees will need to agree to this.

You can set up your salary sacrifice arrangement so employees can opt in or out, agreeing the change to their contract of employment each time, if there’s a significant change to their lifestyle affecting their financial situation (such as marriage, divorce or bereavement).

Remember, salary sacrifice is covered by employment law, not tax or pension law. You may need to take specialist advice if you’re changing employment contracts.

Safeguards for employees
You’ll need to make sure employees are aware of the fact that salary sacrifice could affect their entitlement to the following types of State benefits.

  • Earnings-related benefits, including means-tested benefits and statutory benefits such as sick pay. Employees could qualify for a reduced benefit, or even lose the benefit altogether if their earnings go below the government’s lower earnings limit because of salary sacrifice.
  • Contribution-based benefits such as State Pension. Employees will be paying lower National Insurance contributions, so could build up a lower amount of State Pension.

You may consider not including some employees in your salary sacrifice arrangement if it would make them worse off financially.

You can’t include employees in a salary sacrifice arrangement if it would take their earnings below the National Minimum Wage. You’ll need to have a system in place for checking this.