WORKPLACE SAVINGS EMPLOYER STANDARD GUIDE SALARY SACRIFICE SALARY SACRIFICE: WHAT IS IT? We ve put together a guide to help you understand what salary sacrifice is, how it works and whether it s right for you.
2 HOW IT WORKS. If your employer uses salary sacrifice, you could exchange part of your salary in return for a regular contribution (or non-cash benefit) from your employer. Your employer would pay this, along with any contribution they might make, directly into your pension pot. Because taxable income is reduced, you would also pay less NIC, which effectively gives you more take home pay than if normal pension deductions were taken. Please see the examples below of take home pay without pension salary sacrifice and then with salary sacrifice: WITHOUT pension salary sacrifice Employee Employer Pension Total Pension Gross pay 25,000 Tax 2,812* NIC 2,069.40 Pension contribution 1,500 (6%)** 750 (3%) 2,250 (9%) Take home pay (after tax) 18,618.60 *Allows for 300 tax relief on pension contribution. ** 1,500 gross contribution ( 1,200 net). With pension salary sacrifice Employee Employer Pension Total Pension Gross pay 23,500 Tax 2,812 NIC 1,889.40 Pension contribution Nil 2,250 (9%) 2,250 (9%) Take home pay (after tax) 18,798.60 ( 180 higher than before salary sacrifice) Figures shown are based on the 2013/2014 tax year. You should be aware that tax rates may change in the future.
3 The chart below shows how much you could save each year (effectively increasing your take home pay) based on different contribution levels to your pension. Your annual pension contribution: If you earn between 7,755 and 41,450*, you could save: If you earn over 41,450, you could save: 500 a year 60 10 1,000 a year 120 20 3,000 a year 360 60 5,000 a year 600 100 * If you earn less than 7,755 a year (or 646 per month) you don t pay National Insurance s (NIC), so you won t make NIC savings through salary sacrifice. OTHER BENEFITS Other benefits of using salary sacrifice may include: You could receive an increase in child tax credits. You may regain part, or all, of your entitlement to child benefit should salary sacrifice reduce your earnings assessable to tax to under 60,000. If you are a higher rate taxpayer, you benefit from immediate higher rate tax relief instead of claiming it from HM Revenue & Customs (HMRC). If you earn in excess of 100,000, you may have the chance to regain your personal allowance, depending on the size of your salary and the amount you choose to sacrifice.
4 YOUR SALARY SACRIFICE SCHEME. So here s how your type of salary sacrifice scheme works against the normal contribution method: Salary Sacrifice (standard) redirects your NIC savings into your salary, effectively increasing your take home pay. The diagram below helps to illustrate this. Before salary sacrifice Take home pay Income tax NIC Pension contribution After salary sacrifice Take home pay Income tax NIC Pension contribution IS SALARY SACRIFICE RIGHT FOR YOU? Salary sacrifice is not right for everyone. You should consider the following: Your entitlement to state benefits such as statutory sick pay, tax credits and the State Second Pension (S2P) could be reduced (government plans to introduce a flat rate pension by 2016 will mean that S2P will be abolished). The amount that some mortgage and money lenders will be prepared to loan you will be based on your gross earnings. Therefore, salary sacrifice could reduce the amount you can borrow. Please check with your employer, as they may use a notional salary (the pre-sacrificed amount) in such a calculation. Under HMRC rules, your gross earnings can t fall beneath the national minimum wage as a result of salary sacrifice. Your death in service benefits may be reduced (if applicable). Again, such benefits are usually based on your pre-sacrificed salary.
5 ADDITIONAL INFORMATION. Please also note: Pension contributions through salary and bonus sacrifice are treated as employer contributions. A salary sacrifice arrangement cannot take you below the national minimum wage. Earnings must not drop below the Lower Earnings Limit or you may lose the rights to State benefits. Your employer must agree the terms of the arrangement with you before any reduction is made. This must be documented in writing and will require you to sign and date it. Legal & General cannot advise you on whether salary or bonus sacrifice is right for you or your company. You should speak to a financial adviser for further information.
You may wish to consult your financial adviser(s) on any investment options. Please be aware that Legal & General do not offer or provide financial advice, and where you invest your money remains your choice. www.legalandgeneral.com/workplacebenefits Legal & General Assurance Society Limited Registered in England No.166055 Registered office: One Coleman Street, London EC2R 5AA We are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. We are a member of the Association of British Insurers. Q0039593 05/13 H139072