A Guide for Employees Salary Sacrifice and Pension (Including Bonus Sacrifice)
A guide for employees Salary sacrifice and pension (including bonus sacrifice)
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Did you know that salary sacrifice (also known • It provides you with a tax-efficient way to save for as salary exchange, SMART Pensions and Smart your retirement. Pay) can provide you with an opportunity to Depending on your circumstances there may be disadvantages to salary sacrifice and it’s important you understand these. increase your pension contributions without We explain these in ‘What you need to be aware of affecting your net income (this is the income about salary sacrifice’ later in this guide, and it’s left after you have paid tax and national important you read this section. insurance contributions)? How is salary sacrifice What is salary sacrifice? arranged? A salary sacrifice scheme is an arrangement between you and Strict rules apply to salary sacrifice to protect both you your employer in which you agree to a reduction in your salary and your employer. The following factors laid down by or bonus, and in return you receive a benefit. The benefit here HM Revenue & Customs (HMRC) for salary sacrifice is a contribution by your employer of an equivalent amount need to be met: into your pension. This way you can save on income tax and • Your terms and conditions of employment need to both you and your employer can save on national insurance be revised. contributions (NIC). • This revised contract must state that you are entitled to The sacrifice is achieved by varying your terms and conditions a lower cash payment and separately a benefit (in this of employment as you are giving up your contractual right to case an enhanced employer pension contribution) as a future cash payments of the amount sacrificed. result of a sacrifice. • The agreement between you and your employer Advantages of salary must refer to the benefit being given in exchange sacrifice for you for the sacrifice. • Salary sacrifice can be used to maintain your level of • Only your entitlement to future salary can be sacrificed pension savings and see an increase in your net take home and this must be done before it is treated as received for income. tax purposes. • Or, salary sacrifice can be used to boost your pension The information contained in this guide is based on Aviva’s savings while leaving your net take home income interpretation of current legislation, taxation law and HMRC unchanged. practice for the 2021/22 tax year, which may change in the future. • You can save NIC of 12% of the amount sacrificed on earnings above the primary threshold (£9,568 for tax year The value of any tax relief depends on your financial 2021/22). For any earnings above the upper earnings limit circumstances. (£50,270 for tax year 2021/22) your NIC saving will be 2%. • Your earnings that would be taxed can be sacrificed into pension contributions which are not taxed.
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The purpose of this table is to demonstrate the amount by which your net (take home) income increases under salary sacrifice whilst maintaining the same total pension contribution. You can also choose to use the savings generated by salary sacrifice to increase your pension contribution which would mean that your take home income would be the same. This is just an example calculation and how much you save will depend on by how much you choose to reduce your monthly pay.
Basic rate tax payer Non salary sacrifice Salary sacrifice Annual salary £30,000 £28,500 Monthly salary £2,500 £2,375 Employee contribution before tax relief £100 £0 Employee contribution after tax relief added £125 £0 Tax £290.40 £265.40 National Insurance £204.36 £189.36 Take home pay* *£1,905.24 *£1,920.24 Employer contribution £125 £250 Total invested per month in pension £250 £250
Employer monthly NI saving which they may choose to £0 £17.25 re-invest in your pension *Take home pay is £15 per month greater under salary sacrifice
Higher rate tax payer Non salary sacrifice Salary sacrifice Annual salary £60,000 £58,500 Monthly salary £5,000 £4,875 Employee contribution before tax relief £100 £0 Employee contribution after tax relief added £125 £0 Tax £952.60 £902.60 National Insurance £423.26 £420.76 Take home pay* £3,524.14 *£3,551.64 Higher/Additional tax relief reclaimed via self-assessment £25 Final net income allowing for higher rate reclaim *£3,549.14 £3,551.64 Employer contribution £125 £250 Total invested per month in pension £250 £250
Employer monthly NI saving which they may choose to £0 £17.25 re-invest in your pension *Take home pay is £2.50 per month greater under salary sacrifice (after allowing for the higher rate tax relief that is claimed through self-assessment in the non salary sacrifice scenario). Please note, the examples in this guide are not appropriate for Scottish tax payers.
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Example monthly payslip
Employee Name Employee Number Tax Period There is not a set Tax Code N.I Number way in which salary N.I Code sacrifice needs to be demonstrated on a Payments Deductions This Period payslip. Much of this Descr iption Cash Descr iption Cash Descr iption Cash will depend on the Reference salary £2,50 0.0 0 Ta x £265.40 Taxable Pay £2,375.00 NI – EE £189.36 payroll system your Salary sacrifice -£125.00 employer uses and
Year-To-Date whether employee
Ta x benefits are based on NI – D Taxable Pay the higher or reduced NICable gross salary.
Payments £2,375.00 Deductions £454.76 Net Pay £1,920.24
Paid By BA CS Sor t Code Account Number The reference salary is Salary sacrifice shown on a your pre-sacrifice salary. standard payslip as a reduction to salary before tax and NIC.
Salary sacrifice should not reduce your cash pay to What you need to be aware below the national minimum wage. This means that if of about salary sacrifice you are working full-time and earn around £15,000 a year or less, you should take care when considering any Like any financial decision salary sacrifice is not salary sacrifice scheme. suitable for everyone. You should be aware of the potential drawbacks and take these into account Any amount that you sacrifice is taken from your pay before deciding. before tax is deducted. If you are a non-taxpayer (you earn less than your personal allowance), you do not You need to be aware that salary sacrifice could affect benefit from the tax relief that a taxpayer would receive. your current or future entitlement to a range of state If you are paying into a personal pension, it may be more benefits, including the receipt of tax credits. cost effective to pay personal contributions rather than If your earnings (after salary sacrifice) fall below use salary sacrifice, as personal contributions are a certain limit (currently £6,240* a year), you won’t automatically deducted net of basic rate tax relief be eligible for: regardless of the amount you earn. • statutory sick pay; Other possible impacts are on your borrowing levels, • statutory maternity, paternity or adoption pay; such as mortgage borrowing, credit card and personal loan limits, income protection insurance benefits and incapacity benefit; • redundancy entitlements. jobseeker’s allowance (although means-tested • Pay-related benefits, such as overtime payments, life benefits may still be claimed). insurance, salary increments and final salary pension If you have not paid enough NIC on your income, state benefits, may be calculated on your ‘reference’ salary, i.e. pension benefits may also be reduced on retirement. your salary before the sacrifice. This will depend on what your employer has stated in your employment contract. *2021/22 limits
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AV587556_MPEN15D_NG08052_0421.indd 3 6/10/21 2:17 PM Bonus sacrifice Things to be aware of about In the same way that you can sacrifice earnings for a bonus sacrifice non‑cash benefit, such as pension contributions, you can also sacrifice some or all of your bonus. • The bonus must be sacrificed before you receive it. • You cannot change your mind once you have agreed to sacrifice the bonus. • Bonus sacrifice can also affect your entitlement to state benefits.
You are a basic rate tax payer You are a higher rate taxpayer
Your employer offers you £10,000 bonus which you Your employer offers you £10,000 bonus which you can take as cash or a pension payment can take as cash or a pension payment
Salary sacrifice: If you take the bonus as Non salary sacrifice: If you take the bonus as If you take cash a pension payment your If you take cash you pay a pension payment your you pay £4,000 employer pays £10,000 £2,000 income tax employer pays £10,000 income tax into your pension into your pension
Your employer can Your employer can pay their NI saving of pay their NI saving of You pay £1,200 NI You pay £200 NI up to £1,380 into your up to £1,380 into your pension† pension†
Your total pension Your total pension You receive a net You receive a net investment is up to investment is up to bonus of £6,800 bonus of £5,800 £11,380 £11,380
†Your employer will decide how much of their saving will go into your pension. The maximum amount is 13.8% of the bonus. These calculations assume the employer contributes the maximum amount of their NI saving into your pension.
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your pensions savings, generally your net spending income Questions & answers will remain unchanged. However, your gross pay will be If I decide not to opt for salary sacrifice initially, reduced due to salary sacrifice and this may impact your when can I join in the future? ability to qualify for a mortgage or loan. Joining a salary sacrifice scheme is subject to eligibility, the What happens if I take unpaid leave? terms and conditions of the scheme, your acceptance of a While you are taking unpaid leave, you will not be able to change to your contract of employment, and the scheme participate in a salary sacrifice agreement. Any employer’s continuing in existence. You will need to check with your contributions can usually continue to be paid into your employer if you can join the salary sacrifice scheme at a pension; however, they are not bound by law to do this. later date. What is the effect of salary sacrifice on how much Can I withdraw from salary sacrifice at any time? I can pay in? Subject to the rules of the salary sacrifice scheme of your You can pay as much as you want into a pension scheme, employer, you can withdraw from salary sacrifice for pension however, HMRC puts a limit on the total amount you can pay at any time although you will need to check with your before a tax charge is payable. For the 2021/22 tax year this employer to find out when you will be able to choose salary annual allowance is £40,000. or bonus sacrifice again. If you earn more than £200,000 in threshold income (2021/22), Are there any restrictions on eligibility for your annual allowance may be reduced and a ‘tapered annual salary sacrifice? allowance’ may apply. From 9 July 2015 any new or renegotiated There are certain restrictions on eligibility. At any time during amounts sacrificed from pay have been included when your employment your gross pay must not fall below the determining threshold income. This prevents the use of salary national minimum wage or national living wage rates, either sacrifice to avoid the tapered annual allowance. If you are a before or after the salary sacrifice reduction. The rates from high earner and you think this may affect you, please speak to 1 April 2021 are: a financial adviser. – £6.56 for those aged 18–20 For more information please visit: www.gov.uk/tax-on- – £8.36 for those aged 21–22 your-private-pension/annual-allowance – £8.91 for those 23 and over Where can I get independent financial advice? You are not able to sacrifice statutory maternity, paternity, If you don’t already have a financial adviser, you may be able adoption pay or sick pay. If you have already joined the to find one using the contact details below. scheme before taking maternity, paternity or adoption leave, Unbiased: www.unbiased.co.uk you will receive statutory maternity, paternity or adoption You may be charged for any advice from an adviser. pay in full and employer contributions will be maintained at the level they were prior to you taking the leave, including the What are the charges for joining the salary amount you would have been sacrificing. While in receipt of sacrifice scheme? statutory sick pay, employer contributions will be based You will need to check with your employer if there are any upon your sick pay received at the percentage agreed under costs associated with salary sacrifice. your salary sacrifice agreement. Can I sacrifice any redundancy payment? How will salary sacrifice affect my tax credits? Yes, you should be able to sacrifice all or part of a redundancy Tax credits are benefits for families with children and payment, if your employer provides this facility. Any amount working people on low incomes. The amount of tax credits sacrificed is classed as an employer contribution and does you receive depends on your total family income and your not attract tax relief. As the first £30,000 of redundancy pay is own family circumstances. normally free of both tax and NI, there are few benefits to HMRC administers tax credits and for more information on sacrificing this amount. Any amount over £30,000 is subject how salary sacrifice could affect the amount of tax credits to income tax at your normal rate, though again there should you receive, call the tax credits helpline on 0345 300 3900. be no NI liability. You could therefore save income tax on any amount sacrificed over £30,000. This means that the benefits If I work additional hours, what rate will I get paid? of sacrificing redundancy pay are not as clear cut as with Your terms and conditions of employment with your salary or bonuses. You should take professional advice before employer will show whether your overtime pay is based on making a decision. You may be charged for this advice. your salary before or after sacrifice. For more information on redundancy payments, If I apply for a mortgage, a loan or similar financial visit the HMRC website at: transaction, what should I quote as my earnings? www.gov.uk/calculate-your-redundancy-pay You should quote your revised gross pay (following salary If you are ready to take advantage of salary sacrifice, sacrifice). If you decide to opt for salary sacrifice to boost please contact your employer.
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AV587556_MPEN15D_NG08052_0421.indd 5 6/10/21 2:17 PM Aviva Life & Pensions UK Limited. Registered in England No. 3253947. Registered office: Aviva, Wellington Row, York, YO90 1WR. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Firm Reference Number 185896. Telephone 0345 602 9221 – calls may be recorded. www.aviva.co.uk Member of the Association of British Insurers.
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