What is Salary Sacrifice?

What is Salary Sacrifice?

Salary sacrifice is an option where the employee will not make a contribution directly into their pension plan. Instead they will agree with their employer that their gross basic salary is reduced by an amount they wish to contribute. This money is then paid into the pension plan as an employer contribution. The employer makes this payment on top of their usual payment. 

Paying in like this means that both the employee and employer make a saving on National Insurance Contributions.

Salary sacrifice is a contractual arrangement between employee and employer. Normally you cannot change or stop the sacrifice agreement during the agreement period, except in certain circumstances.

The potential disadvantages of Salary Sacrifice are as follows:

  • ​A number of State benefits depend on maintaining a minimum level of National Insurance Contributions (for example, the State Second Pension, Incapacity Benefit, Statutory Sick Pay, Statutory Maternity Pay and Job Seekers Allowance).  However, for most employees, paying less in National Insurance will not adversely affect your entitlement to State benefits. 
  • Reducing your salary could have an adverse effect on your borrowing capacity for Mortgages, credit card limits, personal loans etc.
  • Any reduction of salary may reduce your entitlement to the State Second Pension (S2P) or the level of your rebate if you are contracted out.

Default investment funds for GPP must include a lifestyling feature. Lifestyling funds will slowly switch into more cautious funds in the years leading up to a plan’s Selected Retirement Age. This is designed to protect a members’ fund from any sharp decline in value as they appraoch their retirement.

Please continue to have a look around our knowledge centre where you can find more information on final salary pensions or inheritance tax rules that might be relevant or contact us for a more personal recommendation.

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