Why your clients should consider salary sacrifice

James Hay Partnership’s Neil MacGillivray explains how a client can get more for less.

The challenge of satisfying employee remuneration demands, particularly during these tough economic times, has never been more of an issue. With business owners looking to minimise costs and simultaneously employees grappling with high inflation and low, or non-existent, pay increases, there has never been a better time for advisers to revisit the benefits of salary sacrifice.

There are few arrangements available which benefit both employer and employee at no additional cost, and more importantly are not contentious with HMRC.
The principle behind salary sacrifice is quite simple: an individual gives up the right to part of their salary in return for the employer agreeing to provide a non-cash benefit.

In the scenario we will look at, the employer makes a pension contribution in lieu of the employee’s salary. The national insurance (NI) saved by the employee is used to boost the amount paid to their pension, as could all or part of the NI saved by the employer. Given the recent 1% increase in both employee & employer NI contributions, salary sacrifice is more attractive than ever.

Two examples

John earns a basic annual salary of £49,000 and makes a net pension contribution of £2,400 pa. (£3,000 gross). His net disposable income is as follows:

If John sacrifices £3,103 of his income, and his employer makes a pension contribution of the same amount, his net disposable income is as follows;