With pension salary sacrifice (sometimes called salary exchange), employees agree to reduce their gross salary by their pension contribution amount, with the employer paying that sum directly into the pension instead. Because the contribution never hits the employee’s payslip, neither party pays National Insurance on it, potentially saving employers around 15% on every pound contributed. The employer then has the choice of either keeping the saving or making an additional contribution into the pension, boosting their employee’s pension package.
A non-salary sacrifice pension works differently. It is common for the employee to contribute from their net pay, and basic rate tax relief is automatically claimed by the pension provider, with additional rate tax relief needing to be manually claimed separately by the employee. Many employees who pay a higher rate of tax are unaware that they need to apply to claim the additional tax relief and miss out. The ‘relief at source’ method of paying pension contributions can seem simpler to administer but leaves both employer and employee paying NI on those contributions unnecessarily. For most UK employers, salary sacrifice is the more tax-efficient route, and if your current scheme isn’t using it, there’s likely money being left on the table every month.
