Salary Sacrifice to Boost Pension Funding

3rd March 2014

As employer funding of occupational pension schemes becomes more expensive and complex, many employers are abandoning this traditional remuneration channel, leaving employees to organise and fund their own retirement income planning.

This change in policy will typically be structured by an increased salary, to enable the employee to individually contribute directly into a personal pension plan.

An opportunity exists, however, for employees to renegotiate their remuneration package, to sacrifice an element of salary in exchange for the employer contributing directly into the employee’s personal pension plan. Depending on the level of an employee’s salary, such a scheme can be structured to leave the cost to the employer, and the employee’s net disposable pay, unchanged, whilst increasing the pension scheme funding by up to 34%:

  Pre Salary Sacrifice Post Salary Sacrifice
Gross annual salary £20,000 £18,235
Employer’s national insurance £1,763  £1,519
Employer’s pension contribution £2,009
total costs of employment
£21,763 £21,763
Employee’s pension contribution  £1,200  –
Employer’s pension contribution  – £2,009
Government income tax rebate £300
total pension funding    £1,500 £2,009
net disposable pay
 £14,762 £14,762

“Schemes of this nature have obvious attractions to employees, and very little extra administrative work for employers”, commented Ely office payroll bureau partner Barbara Nicholas. “These are genuine win-win situations, where a relatively simple restructuring exercise can effectively lead to both employer’s and employee’s national insurance relief being obtained on the pension funding, as well as the traditional income tax relief.”


Before introducing such a scheme, employers should consider the following:

  • Ensuring that the pension provider’s record correctly reflects whether contributions are received net or gross of basic rate income tax,
  • Taking care to ensure this extra funding and lower salary does not lead to contributions exceeding the maximum percentage allowed by HM Revenue & Customs, relative to an employee’s net relevant earnings,
  • Considering how this affects employment contracts,
  • Deciding whether such a scheme should be offered selectively or to all employees,
  • Evidencing the salary sacrifice in writing, as an amendment to the Employment Contract, before the remuneration in question has been earned.

The benefits of such salary sacrifice restructuring are usually sufficient to warrant the introduction of such a scheme with most employers. With careful structuring, this is a simple means for employers to assist employees financially, without actually increasing their total cost of employment

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