The option to salary sacrifice may be available for those with private pensions, this would be dependent on your employer though. The basic premise of salary sacrifice is that you your salary is lowered in exchange for an additional private pension contribution from your employer. One major benefit of salary sacrifice pension arrangements for an employee and an employer is reduced national insurance contributions.

Salary sacrifice pension and national insurance contributions

Salary sacrifice is set to become more popular with the increase in National insurance contributions in 2011/2012. Due to changes in income tax and the upper earnings limit there will be an increase in national insurance contributions by 1%.

For the employer, there are savings of up to 12.8% in national insurance contributions and this saving may be reinvested into the employees’ private pension. Due to these savings many of the biggest employers in the UK offer this to their employees. If you are not aware of this being offered in your employment it may be wise to contact your HR department to see if this option is available

Salary sacrifice pension – advantages and disadvantages

Advantages

  • Encouragement to increase your private pension contributions
  • Savings in national insurance contributions for employee and employer
  • Potential increase in entitlement to Working Tax Credit and Child Tax Credit
  • Potential to limit liability to higher rate tax

Disadvantages

  • Potential lowering of other benefits such as employer’s death in service benefits
  • Will likely affect your mortgage borrowing capacity
  • Reduction in S2P accrual
  • Reduction in net disposable income.

Salary Sacrifice pension arrangements can be complex and it may be wise to seek an ifa or pension adviser in order to obtain advice on this matter. Calculations can be complex and there are other variables that should be considered. Furthermore, some private pension arrangements may not accept employer contributions and as such you should contact your pension provider to see if this option is available.