Salary Sacrifice to boost pension

DavidLaGuardia

If you work for an approachable employer (more likely in a small busines) or are a director in your own company taking a significant part of earnings in salary consider getting your pension paid directly from your employers.
Reason:
If you put £100 into a pension from your own money it is topped up to £128.21 (the £28.21 being 22% of the total premium)
For a basic rate taxpayerwho is between the lower and upper limits of National Insurance £100 of net earnings has cost the employer the following:
Employer NI=£18.21 + Employee NI=£16.42 + Tax= £32.84 + TakeHome=£100 = £167.46
There is no NI or Tax on employer pension contributions so If this was put directly into a pension, at no extra cost to the employer, a 67.46% increase equivalent to a rebate of over 40% can be achieved.
Obviously some employers may not like the additional admin (I perosnally think this is a trite excuse as it's fairly easy to account for), but an incentive might be for both the employer and employee to gain through the employer not paying their bit of the NI and the employee will still get £149.25 (a 49.25% increase equivalent to a rebate of nearly 33%) which is better than normal.
A higher rate tax payer getting the maximum benefit would get £190.17 at a cost of £100 which is equivalent to 47.4% tax relief rather than the usual 40%

Milarky

This is all correct, but caveats do apply. [They are described by the Inland Revenue in a pdf document, entitled "Salary Sacrifice" which is easily found at their website] These include [in no particular order]

1) A sacrifice cannot reduce the hourly pay/salary equivalent to less than the National Minimum Wage [eg if you earn £5.65p/hr - sacrifice is limited to 80p per hour]

2) A sacrifice, because it reduces your contractual pay - even though the employer is diverting the reduction plus his own NI hopefully to your pension, similarly reduces your other salary related benefits. this should not be a serious problem as the major in work 'benefit' could well be the cash value of the sacrifice itself [equal to total NI]- but other SR benefits will be affected by it.

3) Creditworthiness: Your ability to borrow is assessed on your 'income'. Lenders may take the view that they cannot lend as much/on as good terms if the sacrifice significantly reduces your contractual pay. However, there is no automatic reason for this to be the case. Since lending is a disrectionary activity, lenders should listen to the case that a sacrifice is simply an arrangement that leaves you having to make reduced pension contributions directly [from post taxed income] so you aren't really any 'poorer' and can afford to borrow as much. After all if you lost your job/income sacrifice payments would cease also.

4) State benefits: These are impacted by any reduction in your salary resulting from a sacrifice. State Second Pension [S2P] is based on what you earn within three income bands. IF your income was within the lowest band before and after the sacrifice there is no reduction in either S2P or other benefit entitlements. If you income varies within the middle band there is a reduction - but a relatively small one. If it varies within the upper band I'm not sure if any S2P is payable [I'll check that one]. This upper band [above 25K] could be the region where the effect of the sacrifice on S2P has to be weighed against the direct cash benefit. The only serious concern for state benefit entitlement would be where the sacrifice is right down close to the threshold known as the 'lower earnings limit' [about £4660 pa] because if you reduce your income to less than this limit you go from getting basic entitlements to all state benefits [including the S2P] to getting none whatever. However a) the sacrifice will not work at this level anyway - as NI starts higher up now and b) the requirement of the NMW means a sacifice would not be allowed take wages this low either, So I think it safe to say that the effect of a sacrifice on state benefits is minimal - and concentrated at the 'upper' end [above 25k or thereabouts]

On balance therefore a sacrifice is a good idea and the drawbacks not as considerable as they are sometimes stated.