Salary sacrifice is a scheme that allows employees to exchange part of their salary in favour of savings for the future. The savings can take many non-cash benefit forms such as pension contributions.

As employees are giving up a portion of their salary in favour of pension contributions their gross pay will decrease. Therefore, the amount of income tax and national insurance payable will decrease, both for the employee and the employer. 

The example below shows how an employee’s wage structure will change if they switch to the salary sacrifice scheme and currently earn a salary of £50,000 gross and contribute 5% to their workplace pension scheme.

Standard Pension Scheme
Type	Percentage	Amount
Gross Pay	0	£50,000.00
Income Tax	20	£7,486.00
Employee’s NI	12	£4,491.60
Employer’s NI	13.8	£5,644.20
Employee’s Pension	4	£1,750.40
Employer’s Pension	3	£1,312.80
Pension Tax Relief	20	£350.08
Summary
Take Home Pay	£36,272.00
Total Pension	£3,413.28
Cost to Employer	£56,957.00

Salary Sacrifice
Type	Percentage	Amount
Initial Pay	0	£50,000.00
Salary Sacrifice	5	£2,500.00
Gross Pay	0	£47,500.00
Income Tax	20	£6,986.00
Employee’s NI	12	£4,191.60
Employer’s NI	13.8	£5,299.20
Employee’s Pension	0	£0.00
Employer’s Pension	3	£1,500.00
Pension Tax Relief	0	£0.00
Summary
Take Home Pay	£36,322.40
Total Pension	£4,000.00
Cost to Employer	£56,799.20

The notable difference between the two schemes is the £586.72 total pension increase. Therefore, individuals are able to save more which is extremely important in a period of economic downturn. The other major benefit of the salary sacrifice scheme is that it decreases the cost to the employer and in this example, we can see the savings totalled £157.80.

The current information provided on the salary sacrifice scheme shows it in a positive light but there are also some drawbacks. As gross pay will decrease this will also affect certain benefits, as they are calculated on an individual’s gross pay. For example, maternity pay, and life cover provided could both decrease.

An interesting argument is whether salary sacrifice will affect an individual’s mortgage. Most lenders are more concerned with gross annual income and disregard any loss of income due to salary sacrifice schemes. Therefore, an individual could experience higher mortgage interest rates if they switch to the salary sacrifice scheme. Although, some providers may see the scheme as increasing the likelihood that mortgage payments are met due to the extra disposable income. In conclusion, it is difficult to say whether the salary sacrifice scheme will negatively impact an individual’s mortgage and so it is recommended that an employee speaks to a mortgage provider on their stance on the matter.

Overall, the salary sacrifice scheme could be very beneficial in the current climate as the cost of living is increasing meaning individuals are saving less. The scheme can help mitigate both issues by ensuring pension contributions are made and increasing employees take home pay.

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