Question of the week: Salary Sacrifice

Salary sacrifice schemes generally have a scheme salary which is the pre-sacrifice salary that should be used on credit applications. It's not necessary to report the salary after sacrifice any more than you'd report normal salary after non-sacrifice pension payments. You can adjust the sacrifice amount, typically once a year or at major life events, like moving home (significant for mortgage applications) or death or illness. If an application allows it then it's still a good idea to mention that the pension and other items (can include insurance) are paid by salary sacrifice so the lender can ask questions if they want to. In both cases if the application provides for it you should disclose the amount of pension contribtions being made.

The employer part of the NI bill is often, but not always, added to the payments into the pension. Sometimes only half will be added.

Higher rate tax payers only get 1% NI saving but they get the higher rate tax relief paid into their pension each month instead of having to wait up to a year for it. That gives more time for the investments in the pension to grow. Still, a salary sacrifice scheme that doesn't add any of the employer NI saving is considerably less attractive to higher rate tax payers than basic rate. If the workplace pension offers less good investment options than the free market, or just for added flexibility, the higher rate employees might choose to ignore it and accept the 1% NI loss to get the better options, losing the employer the employer NI saving.

The main con of a salary sacrifice scheme is that you are tied in until the dates when changes are allowed or until one of the major life events happens. A second is that some benefits can be based on the after-sacrifice income and that can sometimes be significant.

HMRC describes the key salary sacrifice issues and the benefits that can be affected. It's important to note that you are giving up your contractual entitlement to the income as cash. You don't give up the employment contract obligation of the employer to make the contributions.

It's almost always a good idea to jump at the opportunity to contribute by salary sacrifice and companies that don't offer such schemes are missing a method that is good for them and their employees.

Salary Sacrifice has been around for over 20 years. Its not something that is likely to vanish. It also isnt something that is likely to be used that heavily as most employers don't allow it. Although there is increased potential from 2012 when paying into a members pension becomes compulsory.

Salary is "sacrificed" not a deduction, it is a 'reduction' so it is important to be clear on what salary (pre or post sacrifice) is used for calculating:

Maternity pay
Occupational Sick pay
Redundancy.

Michael, check with the scheme administrators. There are lots of variations around and the only way to know is to ask.

The typical modern money purchase scheme doesn't use salary sacrifice and it is necessary to claim the higher rate 20%. Hopefully that will change, since salary sacrifice is a good thing.

For salary sacrifice it always is unnecessary to claim the extra 20%.