Two employees can put the same amount towards retirement but see different numbers on their payslips.
The reason may be how their pension contribution is made.
Salary sacrifice – also called salary exchange – is an agreement under which you give up part of your salary, and your employer pays the equivalent amount into your pension instead.
Why Salary Sacrifice Can Be Efficient
Because your contractual salary is reduced, National Insurance is generally calculated on a lower figure. Your employer can also make an NI saving and some employers choose to pass some or all of this saving into employees’ pensions.
For comparison, a conventional personal contribution may be made through relief at source, where the provider claims basic-rate tax relief and adds it to the pension. Higher or additional-rate taxpayers may then need to claim further relief themselves, depending on their circumstances and the scheme being used.
The important point is that the route money takes into a pension can affect both the payslip and how tax relief is obtained.
There Are Things to Check
Salary sacrifice reduces contractual cash salary, so employers need to consider how they calculate salary-related benefits such as life cover, overtime, mortgage references or statutory payments. Many employers use a pre-sacrifice or “reference” salary for certain benefits, but arrangements differ.
There is also a future change on the horizon. From April 2029, the Government plans to restrict the National Insurance advantage of pension salary sacrifice to the first £2,000 of employee pension contributions each year. Salary sacrifice itself is not being abolished and pension Income Tax relief will continue.
