Salary Sacrifice

amc1

Hi my employer is suggesting that a future contribution increase to my final salary scheme may be funded by a "salary sacrifice" option. Anyone know what this means and what the advantages/disadvantages ?

Kind regards,

Murphy_The_Cat

as an employer i know lots about this one !!

unfortunately, it is quite detailed and takes quite a lot of explaining - but the potted version goes like this.

You volounteer to sacrafice part of your salary (say £10 per week) and instead put it into your pension.

Already you get the benefit of your income tax (either 22% automatically, or 40% via your tax code) added to your pension, but by doing a salary sacrafice you will also add the NI element of your £10 (at 11% = £1.10), plus hopefully your employer will also add the NI element of the £10 that he is saving (at 12% = £1.20) to your pension contribution - please note that he is not under any obligation whatsoever to do so, however seeing as he has suggested the schem to you and that it will cost him nothing it sounds like he intends to any way.

The end result being that from your £10 salary sacrafice, the benefit to your pension will be £10.00 + £2.20 (tax) + £1.10 (your ni) + £1.20 (his ni) = £14.50.

There is a lot more detail than this but this is the short version.

Hope i've helped

MTC

Pal

Most employers do not pay the NI saving into the member's pension. They keep it as a saving to help offset the expense of running the arrangement in the first place.

amc1

I'm a little confused. It sounds as if the increased contribution becomes a little cheaper to me because it escapes NI. But if my pension is based on my final salary should I really be reducing my salary ?

Murphy_The_Cat

pal

in that case i am proud to say that i am in the minority, because i put my NI saving into my employees pension pot.:cool:

I am a bit surprised that you say that other employers use the NI saving to offset the cost of the scheme , as running the salary sacrafice scheme in my company has cost very little to run indeed (1 x direct debit per month to the pension company) - it was however a pain in the bum to set up in the first place (but not a finacial pain !)

MTC

amc1

I'm still confused. If my final salary pension is calculated from my final salary + my years of service + the accrual rate (1/60), what advantage to me is there to paying extra money into the pension pot as oppose to NI contributions. Indeed, isn't it a disadvantage to me as I am reducing my salary which will impact my final pension & any lump sum (never mind my death in service benefits and widow's pension). I'm in my late thirties but there could still be an impact ? Thanks,

Murphy_The_Cat

Hi amcl


sadly my expertise does not extend to final salary schemes - i'm sure that someone else out her in mse land will be able to help you

good luck

MTC

isasmurf

It depends how your company operates. Some companies that use salary sacrifice have a base salary rate which is what their salary would have been without salary sacrifice. This is the rate on which all future pay increases are calculated on.

thirdparty

Salary sacrafice is a way to reduce NI contributions for both the employer and employee.

This is a very popular method for flexible benefits with employers where they provide a benefit to you and reduce your salary to pay for it.

As mentioned for pensions where in stead of paying contributions from your salary you reduce your salary by the same amount. The reduced salary is showed on your payslip and you pay tax and ni conts on this amount hence the ni savings made for yourself and the employer.

The employer will keep a record of your original salary and will use this for future calculation of benefits i.e pay rises or for pension calculation (although you should double check) so therefore you should not lose out.

Another popular benefit is mobile phones. The phone bill is taken straight from your salary and you are taxed on the net amount hence saving on both tax and ni.

You can imagine the huge savings a company can make especially if they have a large workforce so it makes sense for them to offer it.

Debt_Free_Chick

Care is needed in using the "notional" salary for calculation of pension, where there has been a salary sacrifice. Let's say you earn £15,000 and you do a salary sacrifice for £5,000. Now, your employer may use your "notional" salary of £15,000 for a range of purposes e.g. to calculate future salary increases, bonuses etc.

However, for pension purposes, the Inland Revenue will only allow actual earnings to count, when we look at the maximum pension you can earn. In this example, if you had NO other earnings, only your actual salary of £10,000 can be used to calculate the maximum pension.

For most people, this won't be an issue as none of us actually earn the maximum pension, but to illustrate the difference ... for a salary of £15,000 the maximum pension is £10,000 (2/3rds of salary) and for a salary of £10,000 the maximum pension is £6,667.

So long as your pension is within the maximum allowed on your actual salary (not notional salary) then salary sacrifice won't affect you.

All of this falls away in April 2006, when your maximum pension is not directly related to your salary at all.

HTH