Salary sacrifice offers umbrella contractors a practical and tax-efficient way to boost pension contributions.
What is Salary Sacrifice Pension
You agree to give up a portion of your pre-tax salary to have that amount contributed directly to your pension. The advantage is that the contribution comes out before taxes are applied, meaning you pay less income tax and lower National Insurance, contributing toward a healthy pension fund.
If you were to make a pension contribution from your take-home pay, that salary would have already been taxed under PAYE and NICs. This affects your cash flow drastically.
If you’re looking for a way to increase your retirement savings without compromising too much on your current take-home pay, salary sacrifice could be the ideal solution.
Key Benefits
- Tax savings: Sacrificing salary reduces your taxable income, meaning less income tax is owed.
- NIC savings: Because salary sacrifice lowers your gross salary, your National Insurance contributions also decrease.
- Employer contributions: Many employers, including umbrella payroll agencies, often contribute to your pension as part of a salary sacrifice agreement, boosting your pension further.
- More pension savings: By sacrificing part of your salary, you can channel more funds directly into your pension pot, which grows tax-free over time.
Potential Drawbacks
While salary sacrifice offers substantial benefits, knowing the potential drawbacks is important.
- Lower take-home pay: Your salary will be reduced, which might affect your day-to-day cash flow.
- Reduced state benefits: Salary sacrifice can also reduce your entitlement to state benefits, such as Statutory Maternity Pay or Statutory Sick Pay because these are based on your salary after the sacrifice.
- Impact on Mortgage: Since your gross salary decreases, some lenders might view this negatively, especially if your salary drops significantly.
- Salary sacrifice limits: If your sacrificed salary takes you below the National Minimum Wage, you’re not eligible for salary sacrifice. Therefore, ensuring your salary stays above this threshold after the deduction is important.
Can Umbrella Contractors Use Salary Sacrifice?
Yes, umbrella contractors are eligible for salary sacrifice. However, there are some conditions you need to be aware of. Your gross salary after sacrifice cannot drop below the National Minimum Wage. If your earnings after sacrifice dip below this threshold, you won’t be able to participate in the scheme.
Frequently Asked Questions
How much can be sacrificed?
You can pay a fixed amount, but this must not lower your gross pay than the National Minimum Wage for the hours worked.
Being in a pension scheme, you have an annual allowance, which limits the amount you can save in your pension fund within a tax year (6 April – 5 April) without incurring penalty taxes.
In the last case, you will pay tax only if you exceed the annual allowance.
When are payments made, and to whom are they made?
Depending on the provider’s needs, payments are made via bank transfer on a regular (weekly or monthly) basis.
The earlier you start, the better positioned you’ll be for a financially secure retirement. Talk to us about setting up a salary sacrifice scheme.
