From the employer’s point of view, both salary and pension contributions are tax-deductible as long as they are “wholly and exclusively” for the purposes of the business.
In simple terms, as long as the whole package is reasonable for the level of employee (or director) for the work they do and the value they add to the business, then the deduction should be allowed.
From the employee’s point of view, the contribution is paid gross, so from an income tax perspective they are in the same position as if they had paid tax then made a personal contribution and claimed back any additional tax relief.
Where salary sacrifice trumps personal contributions – whether RAS or net pay – is that there are also NIC savings to be had by both parties. There sometimes can be confusion between net pay and salary sacrifice, as both reduce pay on which tax is calculated, but a differential factor is that NICs are still due on net pay deductions but not on any salary sacrificed.
As a lower salary is paid, the employee will have a lower NIC bill. The employer will also pay less employer’s NIC – and this saving is bigger than the employee’s. Some employers may pass some, or even all, of this saving on to their employees too.
If an employer offers salary sacrifice, then this will always be the most tax-efficient option, as both income tax and NIC savings can be made. However, it does mean receiving a lower salary, which can have implications for life cover or mortgage applications operating on a multiplier of salary basis, or certain state benefits – for example, statutory maternity pay.
Lisa Webster is senior technical consultant at AJ Bell
