Is salary sacrifice more attractive since the introduction of the Health & Social Care Levy?

We have written previously about how employees exchanging part of their salary and/or bonus for increased pension contributions has become common.

We explained how this can be far more attractive than the employee making a direct pension contribution on his/her own behalf.

Attractions of salary sacrifice

Contributions paid out of an employee’s after-tax pay are less attractive as the employee (and the employer) will have paid NI contributions, and the new 1.25% Health & Social Care Levy, on the gross income received.

If instead, the employee can agree with their employer to sacrifice salary/bonus equivalent to the desired pension contribution there will be the following advantages when that amount is paid as an employer contribution. This can result in a 43.6% increase in the pension contribution of a basic rate taxpayer (Previously 33.88% before the recent tax rises). For 40% and 45% taxpayers, the increases are 21.7% and 22.3% respectively (Previously 17.7% and 18.05%).

The first example is that of a 20% taxpayer:

	Personal contribution	Salary sacrifice employer contribution (sacrificed amount + NI saving)
Tax rate	20%	20%
	£	£
Gross salary	1,000	Nil
Employer pension contribution	Nil	1,151
Employer NI contribution (13.8%)	138	Nil
Health & Social Care Levy (1.25%)	12.5	Nil
Total employer outlay	1,151	1,151
Employee salary	1,000	Nil
Less income tax	(200)
Less NI contributions (12%)	(120)
Less Health & Social Care Levy (1.25%)	(12.5)
Net pay = pension contribution	668
Tax relief @ 20%	133.5
Total pension contribution	801	1,151

The second and third example is of 40% and 45% taxpayers. This example shows the amount of contribution that could be paid, either as a direct employee contribution or via salary sacrifice, assuming the employee is a 40% taxpayer, and the employer is prepared to increase the salary sacrifice pension contribution by their NI contribution saving. This is based on £1,000 gross salary and assumes the Annual Allowance is not an issue.

	Personal contribution		Salary sacrifice employer contribution (sacrificed amount + NI saving)
	£		£
Tax rate	40%	45%	40%	45%
Gross salary	1,000	1,000	Nil	Nil
Employer pension contribution	Nil	Nil	1,138	1,138
Employer NI contribution (13.8%)	138	138	Nil	Nil
Health & Social Care Levy (1.25%)	12.5	12.5	Nil	Nil
Total employer outlay	1,151	1,151	1,151	1,151
Employee salary	1,000	1,000	Nil	Nil
Less income tax	-400	-450
Less NI contributions (2%)	-20	-20
Less Health & Social Care Levy (1.25%)	-12.5	-12.5
Net pay = net pension contribution	566	516
Tax relief	377.18	422.00
Total pension contribution	943	938	1,151	1,151

A taxpayer could also see a benefit in terms of reducing or eliminating the high-income child benefit charge on income above £50,000. For taxpayers with income between £100,000 and £125,140, salary sacrifice planning can also be used to reclaim the personal allowance in addition to the income tax and NI savings.

There will also be no need to claim tax relief via your tax return if you are a higher or additional rate taxpayer.

Conditions for a successful salary sacrifice

It is important to note that the salary sacrifice will be effective for all purposes and to be effective it must comply with the criteria set out in the ‘Employment Income Manual’ issued by HMRC. For a salary sacrifice to be effective it must be made before the remuneration being given up is treated as received for employment income tax purposes. For an employee this will normally be the earlier of:

• the date the payment is made, and
• the time the individual becomes entitled to the payment.

Other considerations

If you are working out whether salary sacrifice is right for you, it is important to consider the impact the salary sacrifice may have on other areas. For example, your death in service may reduce if you lower your salary. You may find it harder to get a mortgage if your salary falls.

Another consideration is that rules may change in the future. As soon as the tax changes were announced stories in the papers were commenting on how salary sacrifice could be next.

If you want to talk about anything, feel free to book a free no-obligation chat here.