What is a salary sacrifice pension scheme?
A salary sacrifice pension scheme is an arrangement where an employee agrees to reduced contractual earnings to receive pension contributions equal to the amount of pay they have sacrificed.
Salary sacrifice reduces gross pay by the amount of the pension contribution. In turn, this reduces the amount of tax and national insurance due.
Salary sacrifice is a tax-efficient and cost-effective way of contributing towards an employee's pension.
How does it work?
Salary sacrifice pension contributions are taken from an employee’s gross pay i.e. before tax and National Insurance. These are reported as employer contributions when reporting to your pension provider.
Benefits of a salary sacrifice scheme
The main benefit of a salary sacrifice pension is that is a cost-saving way of contributing to a pension scheme. As a result, employees will likely receive a higher take-home pay than they would through a different tax relief method.
Impacts of a salary sacrifice scheme
Changing to a salary sacrifice scheme constitutes a change to an employee’s contract of employment so the employee needs to agree to join the scheme. In addition to this, salary sacrifice:
Lowers pay for National Minimum Wage purposes.
Lowers the earnings used for statutory payments such as statutory maternity and sick pay.
What to do before setting up a salary sacrifice scheme
Contact your pension provider to set up a new salary sacrifice scheme.
Check low-paid earners who might fall under the National Minimum Wage (NMW) rates once a salary sacrifice deduction is taken. You'll need to monitor this each month to ensure employees continue to receive at least NMW.
Consult with your employees about the changes. They must contractually agree to enter the salary sacrifice scheme. If some employees do not agree, you must offer an alternative scheme.
Instances when salary sacrifice can't be deducted
As salary sacrifice is a contractual arrangement, there are some exceptions as to how pension contributions should be calculated and what they should be deducted from.
Salary sacrifice can't be taken from an employee in receipt of the National Minimum Wage.
Salary sacrifice can't be deducted from statutory sick pay and statutory parental payments including; maternity, paternity, adoption, bereavement and shared parental pay. For further information about how the impact of salary sacrifice schemes on statutory payments, please refer to our Help Centre article.
How to add a salary sacrifice pension scheme on PayFit
From the left, choose Pensions then My schemes.
At the bottom of the page, click Add New Pension Scheme.
Complete the settings and choose salary sacrifice as the pay deduction method.
Once the scheme is created, you can add your employees.
To do this in bulk; click Edit contributions within the pension scheme section on the same screen.
To action this per employee; within the employee's record, click the Employment tab, then under the Pensions section, click Edit.
The deduction shows in the gross section of the employee's payslip (as the deduction is taken pre-tax and NI).
Passing on employer national insurance savings
As a salary sacrifice pension scheme deducts the pension contribution before any national insurance (NI) is deducted, both the employee and employer end up paying less national insurance.
Employers may decide to pass on some or all of the national insurance contributions and pass savings to the employee.
Admins can now choose to pass on NI savings in the pension settings for any salary sacrifice scheme as well being able to specify the % of the savings that they would like to contribute to the pension.
How to enable NI savings in PayFit
From the left, choose Pensions then My Pensions.
Within the section related to the relevant scheme, click Transfer NI savings.
Choose whether to transfer NI savings to All eligible employees or Only some employees.
In the How much of your savings to transfer? box, enter the percentage to transfer.
Tip: 100% savings equates to the 13.8% employer's NI rate on the employee's pension contribution, where employer national insurance would normally be due. If the employer doesn't pay national insurance, for example, where the employee is on NI category H and earns under £4189pm, there is no employer NI saving transferred.
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