Many companies, particularly larger ones, offer salary sacrifice schemes to their employees because they are a mutually beneficial, perfectly legal NI dodge.<\/p>\n
That has inevitably prompted speculation that the cash-strapped Government might try to crack down in the Budget on 26 November.<\/p>\n
HMRC has carried out research, initiated under the previous Government and published in the spring, on employers’ experiences of and attitudes to salary sacrifice. Some took this as a sign tighter rules were on the Treasury’s radar.<\/p>\n
So, how does salary sacrifice work and what might change if Chancellor Rachel Reeves decides to rein it in to save money.<\/p>\n
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Salary sacrifice: Many employers offer schemes to reduce their own and workers’ National Insurance contributions<\/p>\n
What is salary sacrifice?<\/p>\n
Workers agree to pay cuts in exchange for higher pension contributions or other benefits such as childcare, workplace nurseries and bicycles.<\/p>\n
This allows both employers and their staff to reduce their National Insurance payments.<\/p>\n
Bumping up pension contributions can reduce your income tax bill. whether you do it via salary sacrifice or independently.<\/p>\n
> Read more: The best self-invested personal pensions (Sipps)<\/a>\u00a0<\/p>\n ‘Salary sacrifice substitutes pension contributions for earnings, so employees “get back” their National Insurance as well as income tax,’ says Gary Smith, financial planning partner at Evelyn Partners.<\/p>\n ‘It\u2019s arguably the case that it\u2019s of more benefit to basic-rate taxpayers because, at 8 per cent on earnings in the basic-rate band, National Insurance tends to make up a higher proportion of their overall tax liability, compared to higher and additional rate taxpayers, who pay an extra NI of just 2 per cent.’<\/p>\n A Scottish Widows survey of 1,000 employers across many sectors found 38 per cent of large firms with 250-plus staff run salary sacrifice schemes, 34 per cent of medium-sized firms with 50-249 employees offer them, and 20 per cent of small firms do so.<\/p>\n How does salary sacrifice work in practice?\u00a0 <\/p>\n Employers can offer workplace pensions on a standard or on a salary sacrifice basis, says Gary Smith of Evelyn Partners. He compares how they work below.<\/p>\n Let\u2019s assume that someone earns \u00a340,000, they are a member of their employers\u2019 workplace pension, and is set up on a 5 per cent employee and 3 per cent employer contribution basis. The employee would be subject to 20 per cent income tax and 8 per cent National Insurance on their salary.<\/p>\n Under a standard scheme:<\/p>\n – Employee would contribute would contribute \u00a31,600 net out of taxed income. This would be paid out of \u00a32,000 gross income – the amount before tax is deducted.<\/p>\n – They would pay 20 per cent income tax on the gross salary of \u00a32,000, so \u00a3400.<\/p>\n – They would also pay 8 per cent National Insurance on the gross salary of \u00a32,000, so \u00a3160.<\/p>\n – The employer pays 15 per cent National Insurance on the gross salary of \u00a32,000, so \u00a3300.<\/p>\n – In this scenario, the employee and employer would pay \u00a3860 in income tax and NI, but the employee receives \u00a3400 tax relief on the contribution they make. The net tax generated by HMRC would be \u00a3460.<\/p>\n Under a salary sacrifice arrangement:<\/p>\n – Employee\u2019s salary reduces to \u00a338,000.<\/p>\n – Therefore, they do not pay any income tax or National Insurance on the \u00a32,000 sacrificed income.<\/p>\n – The employer no longer has to pay 15 per cent NI on the \u00a32,000 sacrificed.<\/p>\n – \u00a32,000 gets paid into the pension as an additional employer contribution.<\/p>\n – HMRC would no longer receive the \u00a3460 net tax, and this is a cost to the public purse.<\/p>\n – Under the salary sacrifice option, the employer could opt to pass on the National Insurance saving as an additional pension contribution for the employee, but there is no requirement for them to do this, and they could retain the full saving.<\/p>\n <!- – ad: https:\/\/mads.dailymail.co.uk\/v8\/us\/money\/moneypensions\/article\/other\/mpu_factbox.html?id=mpu_factbox_1 – ->\n<\/p>\n How might salary sacrifice be overhauled?<\/p>\n Pension consultant LCP says the Government is far more likely to cap salary sacrifice than to scrap it.<\/p>\n This is because scrapping salary sacrifice would hit millions of basic rate taxpayers, whereas capping the amount you can sacrifice, at for example \u00a32,000, would only affect those who could afford to put that much in, including the employer contribution.<\/p>\n Financial services firm AJ Bell says the Chancellor is likely to be looking at a wide range of options ahead of the Budget, including possible changes to salary sacrifice.<\/p>\n It points out any saving to the Government from ending pension salary sacrifice would come from NI.<\/p>\n AJ Bell suggests people with children who earn over \u00a3100,000 might look at other ways to reduce income to avoid the punitive effect of high tax rates and the loss of childcare funding. This could include measures such as making further pension contributions or even moving to a four-day week.<\/p>\n Clampdown would be a blow to savers and employers, say money experts<\/p>\n Cuts to salary sacrifice benefits would put financial pressure on employers and could lead to worse retirement savings outcomes for individuals, according to Aegon’s head of pensions Kate Smith.<\/p>\n More employers have shown interest in setting up salary sacrifice arrangements since the hike in their National Insurance contributions last April, she says.<\/p>\n ‘Salary sacrifice allows employees to exchange part of their salary for non-cash benefits, such as pension contributions, in a tax-efficient manner.<\/p>\n ‘These contributions are exempt from income tax and NI contributions, making them attractive and more affordable for both employers and employees.<\/p>\n ‘Any move to reduce or remove the benefits of salary sacrifice would be a blow to both employers and pension savers, potentially leading to lower retirement savings outcomes. It could also impact the government\u2019s growth agenda if there was a reduction in contributions flowing into growth assets.’<\/p>\n Gary Smith, of Evelyn Partners, says: ‘Salary sacrifice is a very efficient and effective way for employees to save into pensions.<\/p>\n ‘It seems inevitable that watering it down \u2013 or dismantling it altogether – would hit pension saving, not just because the tax incentive would be diluted but also because faith in the pension system would be dented by more Government interference.’<\/p>\n
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