What is salary sacrifice?
The trustees may offer members the opportunity to join a salary sacrifice arrangement whereby the member agrees to give up the right to an amount of pay in return for the employer paying that same amount into the pension scheme. The sacrifice is achieved by varying the member’s employment contract.
This is advantageous to the employer as it reduces payroll costs and they may also benefit from tax cuts. The contract cannot be changed easily so they don’t have to switchback to providing a higher salary.From the member’s perspective, they need to think carefully before agreeing as generally they cannot change their mind. They need to make sure they will benefit from it and check the impact on other benefits.
Their salary is reduced but so are the income tax and national insurance contributions. In effect, more contributions are paid to the scheme without affecting the member’s take home pay.
The amount given up and paid to the scheme is treated as an employer contribution. The employer may also pay their National Insurance savings into the scheme for the member.
Potential issues around Salary Sacrifice
Reducing pay may mean a member loses or reduces their entitlement to statutory payments such as maternity pay, paternity and adoption pay, sick pay, tax credits. Many of these are based on the earnings on which an employee pays national insurance contributions so as these will be lower, the benefits may be affected.
For a DB scheme member the pension at retirement is often based on a "notional” salary (the higher amount if salary sacrifice was not in place), this is to ensure that the member is no worse off. However in some schemes the benefits may reduce if they are based on the lower salary, in these cases the member should check if it is possible to get out of the contract a few years before retirement so that the higher salary is used for calculating the pension benefits.
If a notional higher salary is not applied then death benefits would be affected as again, they would be based on the reduced salary.
Mortgage – for these purposes the actual salary is used and as it is lower it may affect the amount a person can borrow.
