Salary Sacrifice

Benefits of salary sacrifice

When an employer chooses to contribute towards your own SIPP, the contributions can be offset against business corporation tax or business income tax liability. Employers can also save on the National Insurance contributions that would otherwise need to be paid.

As an employee, if your employer agrees to pay employer contributions into your SIPP, you can save on tax and National Insurance too. This can be done through Salary Sacrifice i.e. by exchanging part of your salary for an employer contribution.

How does salary sacrifice work?

All employers must offer a workplace pension and auto-enroll eligible employees. Instead of opening a new pension account under auto-enrollment, an employee can request their employer to contribute towards their own SIPP and avoid having pensions in different schemes as they change jobs.

Employers and employees have to contribute towards the workplace pension. A minimum total of 8% of the employee’s qualifying earnings must be contributed and employers may decide to contribute more than the minimum of 3% that is required. Some employers match what employees contribute or pay even more.

Salary Sacrifice Example

If your total workplace contribution is say £500, you will not pay any tax or National Insurance on this. All of the £500 is paid as gross into your pension. Your employer will not pay National Insurance either.

FAQs

Can your employer contribute to your pension?

Yes. It is a legal requirement that all UK employers need to offer a workplace pension scheme. Whilst your iSIPP isn’t a workplace pension, your employer can contribute to it as well.

Contributions from your employer count towards your annual allowance, but aren’t restricted by the amount you earn.

As an employee, if your employer agree to pay employer contributions into your SIPP, you can save on tax and National Insurance too. This can be done through Salary Sacrifice i.e. by exchanging part of your salary for an employer contributions.

What if you are self employed?

Yes, even as a self-employed individual you can make personal contributions into a SIPP and enjoy the benefits of tax relief.

Can you contribute more than your personal allowance?

Yes. You can contribute more than your allowance as long as you do not exceed your UK earnings. For any contribution above your allowance, a tax charge known as the annual allowance charge will be applied and it will effectively cancel out the tax relief you receive over the allowance.

To understand your current allowance you should also consider any contributions that your employer makes for you, as these also use up your annual allowance.

The ‘Carry Forward’ rule permits individuals to contribute more to their SIPP than the £40,000 annual allowance and still benefit from tax relief, as long as they have any unused allowance in the last three tax years.

In order to use the benefits of the rule, you must have:

Been a member of a pension scheme in each tax year from which you carry forward, even if you did not make any contributions.
Used up your full annual allowance in the current tax year.
Contributed less than £40,000 in one or more of the last three tax years. (This includes personal and employer contributions.)
Earnings of at least the amount you are contributing in that tax year, if you are making personal contributions.

What happens if you have income of more than £240,000?

In the instance where your adjusted income is over £240,000, your annual allowance could be as little as £4,000. This means your annual allowance of £40,000 is tapered. Your adjusted income is broadly your total taxable income, plus any pension contributions paid by your employer. Visit the government website to learn more.

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Salary sacrifice