Salary Sacrifice Pension for Contractors

30.05.22

Are you planning for retirement? Salary Sacrifice offers a great option to increase your pension pot however it does come with both pros and cons.

Below we’ll explore what this actually means and how you go about it:

So What is Salary Sacrifice Pension?

Typically, A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit.

By opting into salary sacrifice with your Umbrella Company, you are agreeing to give up a proportion of your gross pay in return for a benefit, typically this is a salary sacrifice pension contribution however there are other options.

How Does Salary Sacrifice Pension Work?

By accepting a sacrifice, your overall pay will drop, with your allocated amount going to your chosen salary sacrifice tax relief such as your pension. This means lower tax and NI contributions because your take-home pay will drop.

This does have its benefits especially if you are a high net worth individual or high disposable income. You can sacrifice a portion of your salary which you wouldn’t normally miss into your pension pot which won’t attract tax or NI. This method is an attractive way to grow your pension pot and is offered by Evolve to our contractor base.

Disadvantages of a Salary Sacrifice Pension?

A decrease in earnings could affect your ability to claim things such as job seekers’ allowance if needed in the future. A lower salary may affect your ability to secure loans or mortgages in the future, should this be the case, speak to your Evolve representative and we can change the amounts paid.

Is There a Limit to How Much You Can Sacrifice?

The short answer is no however, you need to ensure your payments do not fall below minimum wage. As always, your Evolve representative will be able to provide a free consultation on the best options for your personal circumstances.

There are a number of points to consider if you ask Evolve to opt you into our salary sacrifice scheme:

  1. Think about how much you wish to sacrifice, if you are a low earner, contributions may take you below National Minimum Wage. Salary sacrifice is unlikely to work for those on low incomes, as your take home salary is not allowed to fall below the national minimum wage.

  2. By sacrificing a portion of your salary you could save substantial amounts on tax and NI.

  3. As you are paying into a pension, you do not have to advise HMRC of the salary sacrifice arrangement.

  4. By investing into a pension you also have the opportunity to see your investment grow.

  5. No initial set-up fees so all of your money is invested.

  6. Penalty free payment holidays.

  7. Move the pension to a new employer if you change jobs or continue to invest personally

What’s a typical example?

You can reduce your income tax and National Insurance (NI) contributions by giving up part of your salary and directing it to your pension instead.

In the example shown, the employer would save on NI contributions and might be persuaded to add this saving to the pension contribution, boosting the amount paid towards your pension even more.

Here’s how it might work for someone earning £25,000 during 2022-23, where employees pay 5%, and employers pay 3% of the salary into a personal pension scheme. This reflects the current auto-enrolment contributions.

As your Employer, Evolve cuts the amount paid in salary by £1,000 but makes a corresponding additional contribution to your pension fund.

For many, the thought of giving up £1,000 may sound like a lot of money, but over the course of a year you’ll be losing less than £70 a month (as a basic-rate payer) – it could make a significant difference to your pension pot when you come to retire. Imagine what you could do with the additional income? Salary sacrifice can present an excellent opportunity to increase your pension funds so you can enjoy more of your retirement.

Please note, that the example above takes Income Tax into account however National Insurance contributions will also be a factor.

Evolve works with Smart Pensions allowing you to save for retirement, they also offer free, unlimited access to over 1,200 discounts at major retailers across the UK. You could save over £400 a year.

For an initial free consultation contact our expert team.

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