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How does sacrificing 7.5% of my salary put more money in my pocket?

My employer is introducing a 7.5% Salary Exchange Scheme. How does sacrificing 7.5% of my salary put more money in my pocket each month? I can't make it add up. Maybe Im doing the maths wrong. Could you please explain and do some illustrations at salaries of £45000, £50000 and £55000. Many thanks.


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It matters not what your salary is. The idea is that instead of getting both tax and national insurance on £1,000, say, you get some other benefit worth at least £1,000 which would only attract tax (or not if you are thinking of pension contibutions). You do not pay national insurance contributions on the amount exchanged. That is the main saving. Medical Insurance is a good example of how you can benefit, because the amount charged against your salary exchange would be group premium rates, which are much cheaper than individual premium rates. However, the rxchange is only worth while if there are itrms in the package that you would want to spend the money on anyway. Mike

I should have added that the employer also doesn't have to pay his national insurance, so he saves money as well. Some generous employers share some of their savings with their staff. Mike

Thankyou for taking the time to reply. However i am still stuck as to understand how taking an additional 7.5% of my salary (to put into the existing pension scheme) will have little or no effect on my take home pay. Hence why, for me, it would be useful to see some figures calculated by people who know exactly how to calculate these things - which isnt me! :)

You have to compare making a 7.5% contribution to your pension "with" or "without" salary sacrifice and the answer is that your salary will be reduced less by doing salary sacrifice as you dont pay the NI on that money (and you may have your employer contributing some of their gain, as they dont pay the NI as well, into your pension or reducing the amount you have to pay. Simples.......

The main benefit of paying your pension through the salary sacrifice scheme is that you pay less tax overall. Are you paying the whole 7.5% yourself or is your employer paying part of that? You don't have to pay that much if you don't want to and you could even opt out of the scheme if you really wanted. Check out the gov.uk website and search for workplace pensions, it's pretty clear information on there.

Now we have a liitle more detail, so we can get more specific. You say it is in respect of your existing pension scheme. What % are you paying at the moment and has it already been sacrificed (exchanged), or is it the sacrificing that is new? Are you able to sacrifice for items other than pension contributions? Is the employer going to add some of his savings? The situation is that the main gain is for paying less NI contributions. The other aspect is that, because they don't count as employee pension contributions, you are not restricted to the 15% contribution maximum. All 3 salaries you refer to are currently above the Upper Earnings Limit (UEL) and even with a 7.5% sacrifice they would still be over the UEL. That means you would only save 2% in NI contributions, whereas employees with lower salaries would save 12% of the sacrifice. Mike

But regardless of how, it is legal and lots of companies are doing it, so there's nothing really to worry about. Your take home pay doesn't change much or may even increase because your company accountant has done some magic to make it happen.

Thanks to everyone who took the time to make this clearer to me. Combined with the booklet the company has provided, I think I now understand much better - and yes it does seem as though it will be ok for me. :)

Yes, it is legal. It has been around for about 10 years in its present form. I first came across it administering the UK pension scheme of a British firm of Accountants with an international reputation. I am surprised that this loophole hasn't been closed yet, so take advantage of it while you can. Mike.

OK - Just realised something else. There will be a change to my Terms and Conditions because the Salary Exchange Scheme will 'reduce my contractual gross salary and increase employer pension contributions'. Suddenly its feeling a bit shakey again - tho we are assured that if the scheme proves to be not the right thing to do, then we will have our salaries returned to the pre-Salaary Exchange Scheme amount. I had assumed that, if only for administrative reasons, my contractual gross salary would stay the same, and an indication of the amount sacrificed given. If I were to apply for another job, do I tell them I am earning the pre or post SES gross salary? Oh this is all starting to feel a bit shakey again.

When we first started using the salary sacrifice scheme it was easy to lose track of what peoples "actual" salaries were, we now make sure that when anyone has their annual review we state their actual gross salary and what their salary will be after the pension adjustments. As I said in my earlier post if you're not happy about being made to pay a higher percentage then check the gov.uk website and find out exactly what your rights are then have a chat with your employer.

You should state your Contractual Salary and also the total employer pension contributions. The prospective employer can then deduct their pension contributions to get the equivalent salary. Most large employers should have heard about this by now, even if they don't use it, but small employers might well not. However, you can refer them to the gov.uk site. Mike

Thanks to everyone who responded. Its helped make things a lot clearer.