Salary Sacrifice – Case Study
What is salary sacrifice? Salary sacrifice is an arrangement employers may make available to employees – the employee agrees to reduce their earnings by an amount equal to their pension contributions. And in exchange, the employer then agrees to pay the total pension contributions.
See our case study.
Client contacted VFM to top-up their Pension. The client currently makes personal contributions into a Personal Pension of £490.20 gross after the payment of 20% tax relief from HMRC. However, VFM explained to the client that from a tax perspective it would make more financial sense in this instance to re-direct some of the money currently being paid every month into a savings account, into the pension.
The client decided to increase the pension payment by a further £350pm from net income after tax. The client’s employer is already making a contribution to the same Personal Pension. The £350pm contribution would be grossed up to £437.50 per month after the addition of 20% tax relief, making a total gross personal contribution of £927.70.
VFM explained to the client that instead of making the contribution of £927.70 from net income, the client could forgo this income and instead have it paid directly into his Personal Pension as an employer contribution via Salary Sacrifice, with the employer’s consent. From an income tax perspective, the net result would be exactly the same.
The big saving, however, comes in National Insurance Contributions. The income now being sacrificed and paid into the client’s pension of £11,132.4pa (£927.70 x 12) would not be subject to 12% National Insurance Contributions, a saving of £111.32 per month. In addition the employer also makes a saving in National Insurance amounting to £128.02 per month (13.8% of £11,132.40), which with the employer’s agreement could also be rebated back into the client’s pension giving the client an extra £239.34pm contribution over and above the £927.70 the employer has agreed to pay. Total monthly contribution; £1,167.04.
Tax and NIC rates are based on 2019/20 tax year. This article should not be construed as advice and professional advice should be sought before making such an investment decision.
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