Salary sacrifice is an agreement between an employee and their employer where the employee accepts a lower salary in exchange for a non-cash benefit. Since the employee’s salary is reduced, they pay less in National Insurance (NI) and PAYE tax, which lowers their overall tax liability.
In this case, the non-cash benefit being received is the salary sacrifice itself.
Save More with Focused
Contractors earning around £120,000 per year and contributing £100 per day into their pension could save up to £1,100 per month, that’s £13,200 per year, in tax and National Insurance.
Even better, because your gross pay is reduced by your pension contribution, the employer’s National Insurance is also reduced. At Focused, we pass this saving back to you as additional gross pay.
Benefits of Salary Sacrifice
At Focused, we go beyond the basics. That’s why our umbrella contractors enjoy more than just standard benefits, including the following:
Tax Relief at Source
Your gross pay is reduced by the amount of your pension contribution, which in turn lowers your PAYE and National Insurance payments, potentially saving you hundreds of pounds each month.
More Efficient Tax Planning
If you’re a higher-rate taxpayer, making pension contributions through salary sacrifice can help reduce your overall tax liability.
Regular Automated Payments
Since contributions are deducted directly from your salary, there’s no need to make manual or one-off payments – everything is handled automatically.
Full Employer’s NI Saving Passed On
When your gross pay is reduced by pension contributions, the Employer’s National Insurance also decreases. We pass this saving directly back to you as additional gross pay.
Widest Choice of Pension Providers
Unlike many umbrella companies, we partner with the UK’s leading pension providers, giving you more options to suit your needs.
Greater Flexibility
We’re equipped to handle fluctuating pay rates, varying contribution amounts, and different pay frequencies, giving you more control and convenience.
Common Salary Sacrifice FAQs
What is the impact of salary sacrifice?
Salary sacrifice means agreeing to reduce your salary by a set amount in exchange for pension contributions. While this can bring significant tax savings, it may also affect:
- Mortgage or loan applications
- Statutory benefits (e.g., maternity or shared parental pay)
- Insurance policies (e.g., life cover, income protection, mortgage protection).
We strongly recommend speaking with a pension or financial advisor before making changes.
How much of your salary should you sacrifice?
If you're unsure, a financial advisor can help you decide what works best. A good starting point is to contribute at the lower end of your budget, ensuring you make the most of available tax reliefs. You can always top up your pension later with personal contributions.
Why can’t you sacrifice all of your pay?
We are required to pay you at least National Minimum Wage (NMW) and holiday pay, so pension contributions can only come from your commission. As working hours and pay can vary, we calculate the contribution based on one working day to stay compliant.
What does ‘ERs passed over’ mean?
This refers to Employer's National Insurance (NI) savings. When your gross pay is reduced by pension contributions, the employer's NI liability also drops. We pass that saving back to you as additional gross pay. Note: This extra pay is still subject to income tax and employee NI.
What is adjusted income?
Adjusted income includes your total taxable income:
- Salary
- Bonuses
- Commissions
- Dividends and rental income
- Savings interest
- Plus any employer pension contributions
If your total pension contributions exceed your annual allowance, you’ll face an annual allowance tax charge on the excess. Always factor in all pension contributions (not just those through your umbrella provider), and consult your pension advisor.
Can I start or stop my salary sacrifice contributions?
Yes, you can choose to stop your salary sacrifice at any time. Your gross pay will be adjusted accordingly. To stop, contractor.support@focusedgroup.co.uk - we’ll issue a revised agreement for your records. However, if you stop, you won’t be able to restart until the next tax year (beginning 6th April).
Can I amend my contributions?
Absolutely. If your circumstances change, just contact our team and we’ll help you update your contribution amount.
Who can use salary sacrifice?
Anyone earning above the National Minimum Wage can participate in salary sacrifice.
Why choose a pension over a savings account?
Pensions offer significant tax advantages that regular savings accounts don't. While savings accounts may offer easier access, they are subject to tax on interest and can be eroded by inflation over time.
Pensions, on the other hand, benefit from:
- Tax-free contributions (within allowances)
- Employer contributions
- Tax-free investment growth
For long-term saving, pensions are often a more efficient and rewarding option.