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Salary Sacrifice: Basics
Under a salary sacrifice arrangement the scheme becomes effectively “non contributory” with the employee “sacrificing” an equivalent amount of salary. In return for this, their employer will make a contribution to the scheme on the employee's behalf. This type of arrangement usually means that both the member and the employer pay less national insurance and therefore generally both benefit from a “saving”.
The details of a salary sacrifice arrangement are normally described in a booklet which the employer prepares. The booklet should set out how the arrangement will work and give members the information they will need to decide whether or not salary sacrifice is right for them. This is important because, although it is designed to benefit most members, it will not necessarily be advantageous for everyone (see below).
The key features of such an arrangement are typically
- All existing and new members are automatically opted into salary sacrifice although members are often given the opportunity to opt out if they wish.
- Contributions payable via salary sacrifice will be based on basic salary before taking into account any adjustment for salary sacrifice.
- Some schemes allow one-off or lump sum AVCs to be paid in the same way as is currently provided for under the scheme rules even if the member is participating in salary sacrifice.
- HM Revenue & Customs' restrictions prevent the member from having the right to turn the sacrificed salary back into cash easily. (Otherwise the salary has not been truly “sacrificed”.) The terms of the salary sacrifice arrangement will therefore prevent members from making such changes on a regular basis.
- Where members have very low earnings they would not benefit from participating in salary sacrifice because of the effect paying lower national insurance contributions will have on other benefits (for example, certain state benefits). Some employers deal with this by monitoring employees’ earnings levels before introducing salary sacrifice and on an ongoing basis. If a member’s earnings fall below a certain level the employer will automatically opt them out of salary sacrifice.