Salary Sacrifice

Salary sacrifice is where an employee gives up his or her right to receive part of their salary due under their contract of employment. Usually this arrangement is made in return for the employer's agreement to provide the employee with a non-tax benefit.

When associated with an occupational pension scheme, a scheme member may agree a salary sacrifice with the employer whereby a reduced salary is exchanged for extra employers' pension contributions paid to an occupational pension scheme. Such an agreement also saves the employer National Insurance contributions on the salary sacrificed.

The advantage to the individual is that the extra contributions count towards the calculation of the available tax-free lump sum at retirement. However, salary sacrifice also reduces the size of your defined pensionable earnings for maximum retirement benefits, death in service benefits, widows pension and state benefits.

Information on salary sacrifice is available on the HM Revenue & Customs web site .

Last Updated: March 2008 © Moneyextra.com

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