Salary sacrifice is an increasingly popular option for UK contractors looking to maximise their take-home pay and retirement savings. By reducing your taxable income through a salary sacrifice arrangement, you can contribute more towards your pension while benefiting from tax savings and National Insurance contributions (NICs) relief.
In this guide, we’ll explore how salary sacrifice works, its advantages and potential drawbacks, and how contractors can use this strategy to enhance their financial planning and long-term pension growth. Whether you're a seasoned contractor or new to the world of self-employment, understanding salary sacrifice can be a key tool for securing a prosperous future.
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 of Salary Sacrifice Pension
Potential drawbacks of Salary Sacrifice Pension
While salary sacrifice offers substantial benefits, knowing the potential drawbacks is important.
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.
How much salary 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.