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Salary sacrifice pension examples: See how it works

Tuesday 16th May, 2023

By
Frankie Dewar

The best way to understand how salary sacrifice can save employees and employers money is with real word examples. In this article we'll show how setting up a salary sacrifice pension scheme benefits both by reducing National Insurance.

For our examples we're using a rounded UK average employee salary of £40,000. This is based on information published by The Office for National Statistics (ONS) on average UK salary. The most recent analysis shows mean average salary in the UK in 2020 was £38,600 for full-time employees.

Our pension salary sacrifice examples show two ways to treat the savings made after implementation:

Converting employee salary sacrifice savings to higher take home pay.
Converting employee salary sacrifice savings to higher pension contributions.

In both scenarios the employer also makes a saving on their National Insurance contributions. These examples show the employer savings for one employee but they scale in line with your company size. Larger businesses can make bigger savings.

Minimum auto enrolment contributions

Our first example is based on the rounded average UK salary of £40,000 and legal minimum auto enrolment pension contributions.

The minimum auto enrolment contribution to an employee’s pension savings is 8% of qualifying earnings. Employers must pay at least 3% and the employee the remaining 5%.

Qualifying earnings include salary, wages, commission, bonuses, overtime, statutory sick pay and statutory parental leave pay (maternity, paternity and adoption pay).

Before Salary Sacrifice

Employee:

Gross Salary: £40,000
Tax-Free Allowance: £12,570
Taxable Income: £27,430
Employee Pension Contribution: £2,000
Tax Payable: £5,086
Employee National Insurance Contribution: £3,291.60
Take Home Pay: £29,622.40

Note how the employees' National Insurance is based on their taxable income which is calculated before their pension contribution of £2,000.

Employer:

Gross Salary: £40,000
Employer NI Contribution: £4,264.20
Employer Pension Contribution: £1,200
Total Cost to Employer: £45,464.20

Note how the employers' National Insurance is based on the employee's gross salary.

After Salary Sacrifice, converting savings to higher take home pay

Employee:

Gross Salary: £38,000 (reduced by £2,000)
Tax-Free Allowance: £12,570
Taxable Income: £25,430 (reduced by £2,000)
Employee Pension Contribution: £0 (reduced by £2,000)
Tax Payable: £5,086
Employee NI Contribution: £3,051.60 (reduced by £240)
Take Home Pay: £29,862.40 (increased by £240)

The employee sacrifices £2,000 from their gross salary, which they previously paid into their pension. This lowers their NI contribution and increases their take home pay.

Employer:

Gross Salary: £38,000 (reduced by £2,000)
Employer NI Contribution: £3,988.20 (reduced by £276)
Salary Sacrifice Employer Pension Contribution: £3,200 (increased by £2,000)
Total Cost to Employer: £45,188.20 (reduced by £276)

The employer pays the full pension contribution which previously included an employee contribution. This contribution is made before the gross salary calculation and therefore lowers the employer NI contribution. The result is that the employer saves money.

After Salary Sacrifice, converting savings to higher pension contributions

Employee:

Gross Salary: £37,647.06 (reduced by £2,352.94)
Tax-Free Allowance: £12,570
Taxable Income: £25,077.06 (reduced by £2,352.94)
Employee Pension Contribution: £0 (reduced by £2,000)
Tax Payable: £5,015.41 (reduced by £70.59)
Employee NI Contribution: £3,009.25 (reduced by £282.35)
Take Home Pay: £29,622.40

Note how the employee further sacrifices their gross salary to match their pre-salary sacrifice take home pay. In turn this further reduces their taxable income and their NI contribution. With this salary sacrifice arrangement an increased their employer pension contribution takes place of the previous saving.

Employer:

Gross Salary: £37,647.06 (reduced by £2,352.94)
Employer NI Contribution: £3,939.49 (reduced by £324.71)
Salary Sacrifice Employer Pension Contribution: £3,552.94 (increased by £2,352.94)
Total Cost to Employer: £45,139.49 (reduced by £324.71)

Note how gross salary is further reduced meaning lower NI contributions and a greater reduction in the total employer cost. The Salary Sacrifice Employer Pension Contribution is further increased.

Higher auto enrolment contributions

An employee may like to increase their auto enrolment pension contributions above the minimum threshold. Many employers also match their employee's workplace pension contributions so both are adding the same percentage.

For these examples we'll continue to use our rounded UK average salary of £40,000. Instead of the minimum contributions we'll use an employee contribution of 8% which is matched by the employer.

Before Salary Sacrifice

Employee:

Gross Salary: £40,000
Tax-Free Allowance: £12,570
Taxable Income: £27,430
Employee Pension Contribution: £3,200
Tax Payable: £4,846
Employee NI Contribution: £3,291.60
Take Home Pay: £28,662.40

Compared to the previous pre-salary sacrifice example the employee pension contribution has increased by £1,200 to £3,200.

Employer:

Gross Salary: £40,000
Employer NI Contribution: £4,264.20
Employer Pension Contribution: £3,200
Total Cost to Employer: £47,464.20

Compared to the previous pre-salary sacrifice example, employer pension contributions have increased by £2,000 to £3,200 to match the employee.

After Salary Sacrifice, converting savings to higher take home pay

Employee:

Gross Salary: £36,800 (reduced by £3,200)
Tax-Free Allowance: £12,570
Taxable Income: £24,230 (reduced by £3,200)
Employee Pension Contribution: £0 (reduced by £3,200)
Tax Payable: £4,846
Employee NI Contribution: £2,907.60 (reduced by £384)
Take Home Pay: £29,046.40 (increased by £384)

The employee sacrifices £3,200 from their gross salary, which they previously paid into their pension. The increase in take home pay is higher than the previous example as the savings scale up with higher contributions.

Employer:

Gross Salary: £36,800 (reduced by £3,200)
Employer NI Contribution: £3,822.60 (reduced by £441.60)
Salary Sacrifice Employer Pension Contribution: £6,400 (increased by £3,200)
Total Cost to Employer: £47,022.60 (reduced by £441.60)

After Salary Sacrifice, converting savings to higher pension contributions

Employee:

Gross Salary: £36,235.29 (reduced by £564.71)
Tax-Free Allowance: £12,570
Taxable Income: £23,665.29 (reduced by £564.71)
Employee Pension Contribution: £0 (reduced by £3,200)
Tax Payable: £4,733.06 (reduced by £112.94)
Employee NI Contribution: £2,839.84 (reduced by £451.76)
Take Home Pay: £28,662.40

The employee agrees to reduce their gross salary in order to match their pre-salary sacrifice take home pay. In turn this further reduces their taxable income and their NI contribution. With this salary sacrifice arrangement an increased employer pension contribution takes place of the previous saving.

Employer:

Gross Salary: £36,235.29 (reduced by £564.71)
Employer NI Contribution: £3,744.67 (reduced by £519.53)
Salary Sacrifice Employer Pension Contribution: £6,964.71 (increased by £3,764.71)
Total Cost to Employer: £46,944.67 (reduced by £519.53)

The further reduced gross salary results in lower NI contributions and a greater reduction in the total employer cost. The salary sacrifice employer pension contribution is further increased meaning the employee saves more for their retirement.

Salary sacrifice calculator

For a bespoke example based on your business use our salary sacrifice pension calculator. You'll see how much businesses and employees can save by switching to a more tax efficient pension scheme.

Speak to a Penfold salary sacrifice expert. A member of our team can produce a free, custom analysis on the savings your business could make.

Penfold's tech-first workplace pension makes it easy for employers to set up or convert to a salary sacrifice pension.

Frankie Dewar