Salary Sacrifice
In the context of retirement planning, salary sacrifice (sometimes known as "salary waiver") is a contractual agreement to waive all or part of your salary in return for your employer contributing a preferential (equivalent) sum into your pension plan.
How does it work?
For a salary sacrifice to be effective, it must be 'given up' before it's subjected to tax or National Insurance (NI). This allows you to save the entire amount of your sacrificed income in your pension plan free of tax and NI.
Salary sacrifice also results in savings for your employer, as they don't have to pay NI on your sacrificed income. If your employer passes some or all of these savings on to you, you'll benefit from even larger tax and NI-free contributions at no extra cost.
For these reasons, salary sacrifice can significantly enhance the long-term value of your pension plan, as well as allowing you to enjoy considerable savings.
Indeed the potential benefits you could achieve through salary sacrifice may have risen considerably in recent years following various NIC and tax changes. For instance, since 6 April 2009 there has been a significant rise in the NICs upper earnings limit, personal allowances have been cut if your gross income (before the personal allowance) is over £100,000, and employee and employer NIC rates have been increased by 0.5%.
However, salary sacrifice may not be appropriate for individuals with earnings of £130,000 or more in any tax year from 2007/08 onwards, as - in accordance with new pensions tax relief regulations for high earners - any amount of employment income foregone by salary sacrifice in return for an equivalent pension contribution, where the agreement was put in place on or after 22 April 2009, will be considered relevant income and could result in the application of a “special annual allowance charge” that reduces the tax relief available.
If you are a high earner we would recommend that you seek independent financial advice before entering into a new salary sacrifice arrangement established after 22 April 2009 as this could cause you to suffer a special annual allowance charge.
What you need to consider
Subject to the above, before entering a salary sacrifice arrangement you should consider the effect that a reduction in your pay may have on your salary-related entitlements, such as:
- Pay rises
- Primary pension provision
- Bonuses
- Death in service multiples.
You should negotiate the potential impact of these with your employer. Salary exchange must not reduce your cash pay to below the National Minimum Wage.
Additionally, you should be aware that a reduction in basic salary may affect your credit opportunities - such as mortgages and loans - and influence your state-related provisions and benefits.
Barclays Wealth can work with you to develop a tailored retirement plan that may allow you to take advantage of the benefits of salary sacrifice.
Find out more about salary sacrifice
To learn more about how Barclays Wealth could help you, please contact us and we'll be in touch as soon as possible.
Tax treatment will depend on an individual's personal circumstances and may change in the future. Barclays Wealth does not provide tax advice. If in doubt we recommend you obtain your own independent tax and legal advice tailored to your individual circumstances.
Legal information
This information is based on our understanding of current legislation, taxation law and HM Revenue & Customs (HMRC) practice, which may change in the future. The value of tax relief depends upon your individual financial circumstances.
The products and services described on this page are provided by the following company, Barclays Wealth which is the wealth management division of Barclays and operates through Barclays Bank PLC and its subsidiaries. For further information on these companies and Barclays Wealth please read the Important Information. Each Barclays Wealth company reserves the right to make a final determination on whether or not you are eligible for any particular product or service.
