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.
For a salary sacrifice to be effective, it must be ‘given up’ before it’s subjected to tax or National Insurance Contributions (NICs). This allows you to save the entire amount of your sacrificed income in your pension plan free of tax and NICs.
Salary sacrifice also results in savings for your employer, as they don’t have to pay NICs 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 NICs-free 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.
However, salary sacrifice may not be appropriate for individuals with earnings of £150,000, 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.
