Salary sacrifice is a great way to increase the amount you pay into your pension pot – by saving for your retirement in a tax-efficient manner. Continue reading to discover the benefits of using salary sacrifice, and to find out if it’s available to umbrella company employees.
What is Salary Sacrifice?
Salary sacrifice is a contractual agreement between you and your employer. You agree to give up part of your salary in return for a non-cash benefit. It’s usually, but not exclusively, an employer pension contribution. The amount you choose to sacrifice is up to you and it can either be a fixed amount or a percentage of your monthly income. Once you accept a salary sacrifice, your overall pay will be reduced by the amount you choose to sacrifice, which means less tax and National Insurance Contributions (NICs) will be due on your contract income. Contributions to your pension are also not subject to tax and NICs, making it a desirable option for those who want to save for retirement.
Some umbrella companies (including Churchill Knight Umbrella) offer salary sacrifice
Salary sacrifice is particularly popular with contractors working via an umbrella company. The umbrella company can invest your chosen amount directly into your pension pot before it becomes taxable pay. Whereas, if you make a pension contribution from your own account after you’ve been paid – your salary would have already been subject to tax and NICs. This additional tax break offers an excellent opportunity for contractors who want to save for their future in a tax-efficient way. Salary sacrifice is a great way to control the amount you are saving each month and gives you the freedom to contribute more to your pension pot than a standard workplace pension.
Salary Sacrifice isn’t for everyone
Salary sacrifice isn’t for everyone, and there are some points to consider to determine whether it would be beneficial for you.
- Sacrificing part of your salary means you will earn less, and your entitlement to state benefits such as Maternity/Paternity Pay may be affected if your salary falls below the level at which you pay NICs.
- A decrease in earnings may affect your State Pension or contribution-based state benefits – such as Employment and Support Allowance or Jobseeker’s Allowance.
- Your lower salary may affect the amount of money you can borrow for a mortgage. Mortgage lenders usually calculate how much you can borrow as a multiple of your salary.
- If you are an employee on a lower income, where salary sacrifice pension contributions could take your earnings below the national minimum wage, then you may not be able to join the scheme.
Should I use a Salary Sacrifice scheme?
For many individuals, an umbrella company with a salary sacrifice scheme is an extremely attractive option and a great way to increase your pension pot if you have additional income or are a higher-earner.
The benefits of using a salary sacrifice scheme can often outweigh the disadvantages, particularly when you consider how much better off you could be when you begin to draw your pension. However, salary sacrifice isn’t always beneficial to everyone as your monthly pay retention will decrease, and you may be unsure whether the pros outweigh the cons.
Speak to an expert if you are unsure about your circumstances
Each employee is different, and if you are unsure whether salary sacrifice is beneficial for you, we strongly recommend speaking with a specialist financial advisor. A specialist financial advisor will help you understand your options, find the right pension provider for you, and help you set up a personal pension plan.
Did you know that Churchill Knight Umbrella offer a Salary Sacrifice service?
Churchill Knight Umbrella is delighted to announce that we are now able to offer our umbrella employees the opportunity to benefit from salary sacrifice (pension). Whether you are an existing client or are considering switching to our umbrella service, please give us a call on 01707 871622. Our expert team will provide you with a tailored take home pay calculation, more information about our service and get you set up and ready to be paid with salary sacrifice.
Founded by an IT Contractor in 1998, Churchill Knight has become one of the most respected contractor accountants in the UK. We’ve helped over 20,000 contractors with their accountancy requirements. As well as our accountancy services, we also have an industry-leading PAYE umbrella company and dedicated in-house personal tax department. Whichever service you choose, you can move forward with complete peace of mind. We are proud of the reputation we’ve built over the years, and our FCSA accreditation proves how committed we are to compliance within our sector. Keep reading…