What is salary sacrifice?

Salary sacrifice, in terms of pensions, is a tax-efficient way for employers to make contributions to their workplace pension schemes. Employees agree to give up part of their salary in return for pension contributions and both the employer and their employees pay lower National Insurance contributions (NICs).

Salary sacrifice is a common way for employers to save money and help employees pay more into their pension pot or increase their take-home pay.

How can employers benefit?

At Nest, we understand how rising costs might be affecting businesses and their employees. With salary sacrifice everyone can save. As employees are sacrificing part of their salary, both the employer and their employees pay less in NICs.

Employers could use these savings to:

• pay more into employees’ pension pots and help them save even more for the future
• increase employees’ base pay
• offer an improved benefits package to employees
• reinvest the money they’ve saved back into their business.  

Employees in higher tax brackets will no longer need to claim back additional tax relief directly from HM Revenue and Customs (HMRC) if they switch to salary sacrifice.

Important points to consider

It’s important to consider that salary sacrifice may not be appropriate for everyone, so some areas for caution are listed below:

• employees cannot be included in a salary sacrifice arrangement if it takes them below the national minimum wage. This will need to be monitored on an ongoing basis
• it may affect employees’ entitlement to state benefits
• some employees may be concerned it will impact their ability to secure a loan or mortgage, make an application to rent a home, etc. Some providers will take salary sacrifice into account
• it may impact other benefits the employer provides to its employees, such as life insurance, overtime rates, bonus or commission payments.  

What else do you need to think about?

There are a few more things employers will need to consider before setting up, as follows:

• they’ll need to consider the changes they need to make to set salary sacrifice up with their payroll provider
• they’ll need to be mindful that employees who aren’t eligible for or who don’t agree to the salary sacrifice arrangement will need to have their pension contributions taken in a different way
• key to a successful salary sacrifice pension scheme is how the employer will communicate to new and existing employees that they’re offering salary sacrifice and how it works.
  

Remember, salary sacrifice changes an employee’s terms and conditions of employment and is a matter of employment law, not tax or pensions law. If there’s any uncertainty about whether to offer a scheme of this nature, an employment lawyer or specialist tax adviser could help with the decision. More information can be found at:

• HMRC salary sacrifice guidance: https://ow.ly/I0eZ50UNCrq
• The Pensions Regulator (in ‘Detailed Guidance’, section four): https://ow.ly/TecY50UNCs0‍
• MoneyHelper’s salary sacrifice guide for employees: https://ow.ly/eEgH50UNCsX

Setting up salary sacrifice on Nest

If you’ve decided to use salary sacrifice, please see the tips below to ensure you set this up correctly.

Set up a salary sacrifice worker group in your online Nest account. Make sure this is set up, so all contributions are paid as employer contributions only and that the worker group is named accordingly, for example, ‘Salary sacrifice’.

Employers still need to keep a worker group for those employees who don’t want to or are unable to be part of the salary sacrifice arrangement. We operate pensions tax relief on a relief at source basis for members who aren’t part of a salary sacrifice arrangement. 

Detailed steps of setting up salary sacrifice on Nest can be found here: https://ow.ly/JcBt50UNCwB