Taxpayers get tax relief on their pension contributions. But tax relief on a Salary Sacrifice scheme works differently compared to a workplace pension.
A Salary Sacrifice scheme – or Salary Exchange – is an agreement between you and your employer to reduce part of your salary for a non-cash benefit. This part of your salary would have been subjected to income tax and NI contributions. Instead, your employer contributes this amount to your pension, free of tax or NIC or both.
In a Salary Sacrifice scheme:
- Employees not only pay fewer NICs due to reducing their gross salary,
- But also high earners don’t need to claim back the extra 20%-25%.
Let’s see how Husky ensures you get tax relief while on Salary Sacrifice, and how this scheme works.
How tax relief works in a Salary Sacrifice scheme
In regards to tax relief, a Salary Sacrifice scheme offers simplicity.
In an auto-enrolled pension scheme, pension providers claim the 20% tax relief for you. High earners are then required to claim the extra 20%-25% themselves. Otherwise, they lose it.
But in a Salary Sacrifice scheme, if you’re a high earner, you can make the same pension contribution without needing to claim tax relief separately.
The Salary Sacrifice scheme also offers lower NICs to both the employee and employer.
- The employee agrees to reduce their gross salary (not below National Minimum wage).
- National Insurance is calculated based on lower earnings.
- National Insurance contributions lower for the employee.
- National Insurance contributions lower for the employer.
- Both employer and employee keep more.
- The employer could add these savings to the employee’s pension and boost their retirement savings.
It means more cash in your pocket each month, potentially more pension savings and more cash left in the business.
Husky takes care of all the admin for you, implementing a Salary Exchange scheme successfully and making sure you’re compliant.
Let’s look at an example.
Currently, Lucy earns £60K per year (2022/23) and she is not enrolled in a Salary Exchange scheme.
- She contributes 5% of her earnings per year, which is £3,000.
- The amount of high-rate tax relief Lucy can claim back is £1,200.
- She contributes £126 to her NI record, while her employer contributes £681 per month.
In a Salary Exchange scheme, Lucy reduces her £60K per year, contributing £3,000 straight to her pension.
- her NICs lower as she reduced her gross salary, saving her £121.
- Her employer’s NICs lower, saving them £647 to either reinvest in the company or add it to Lucy’s pension scheme.
- Lucy gets a basic-rate tax relief of £600 as well as high-rate tax relief of £600. In a Salary Sacrifice scheme, she doesn’t have to claim the extra 20% tax herself.
Every financial year National Insurance thresholds and rates change. These are the new tax changes for 2022/23 that will affect NICs in a Salary Sacrifice scheme.
In short, Salary Sacrifice reduces tax, increases your take-home pay and boosts the value of your pension pot.
How Husky helps you benefit from a Salary Exchange scheme
A Salary Sacrifice scheme is more than just tax savings.
It’s a company benefit. It saves you time, and it saves you money.
Husky takes care of Salary Exchange from start to finish. We set up the scheme for you and ensure that you are fully compliant, giving you peace of mind that your workplace pension is fully managed.
Husky’s solution also increases employee satisfaction as they save more for retirement and they invest responsibly.
Husky is for everyone. Get in touch and find out more.
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We setup and manage your pensions, payroll, and salary exchange—all in one place, ensuring compliance every step of the way.
