Choosing which options employees are offered for paying their pension contributions

There’s more than one way to skin a cat, or pay a pension contribution.

Before we get off on the wrong footing, I promise no cats were harmed in the writing of this article. I also promise no further attempts at humour, not for the rest of this article anyway.workplace-money2 

It’s actually a very serious topic, choosing which options employees are offered for paying their pension contributions. Where scheme rules permit it, there’s a lot of choice and the benefits and/or savings between the different options can be substantial for both employers and their employees. 

So how can you ensure you're making an informed choice?

The table below shows five different ways to slice the same employee pension contribution and the associated tax relief and national insurance (NI) contributions, each with a very different outcome. 

If this was your own pension contribution, which option would you choose?

Employee contribution


Amount invested in pension pot

Employer NI savings 2

Employee NI savings 3
(gross pay increase)


£1,000 deducted from gross pay, or £800 deducted from net pay + £200 basic rate tax relief .1





£1,000 salary sacrifice.

Employer and employee keep their NI savings.





£1,000 salary sacrifice.

Employer keeps their NI savings.

Employee reinvests their NI savings in their pension.





£1,000 salary sacrifice.

Employer reinvests their NI savings in the pension.

Employee keeps their NI savings.





£1,000 salary sacrifice.

Employer and employee reinvest their NI savings in the pension.





1. Assuming the employee is a basic rate tax payer entitled to 20% tax relief (2019/20 tax year).

2. Assuming the employee’s sacrificed earnings are all subject to 13.8% employer NI contributions (typically earnings from £719.01 a month, 2019/20 tax year).

3. Assuming the employee’s sacrificed earnings are all subject to 12% employee NI contributions (typically earnings between £719.01 to £4,167 a month, 2019/20 tax year).

So why doesn’t everyone use salary sacrifice for pension contributions?

In some cases, there are concrete reasons why not. For example, the main teachers’ pension schemes, TPS, STPS and STSS, don’t allow salary sacrifice. It’s another important reason to shop around if you are thinking about leaving the teachers’ pension schemes, to make sure your new pension scheme offers your school and your employees access to key functionality like this that can make a material difference to contribution costs and members’ retirement savings.  workplace-people

There are less concrete issues as well, like the fact that some employers think it’s a grey area legally. That perception wasn’t helped by some of the headlines that followed the government’s announcement in 2016 that it was cutting back on the range of benefits that can be provided via salary sacrifice, for example since 6 April 2017 no new salary sacrifice agreements can be set up for mobile phones, accommodation or school fees and existing agreements are only allowed until the earlier of the end of the agreement, or 5 April 2021.

However, the government also specifically said it is keeping salary sacrifice for childcare vouchers, pensions and cycle-to-work schemes and that remains the case today.

Other employers think that it’s costly to set up, but in our experience most employers’ set up costs can be quickly recouped from their NI savings. It’s one of the key areas we recommend employers check as part of a feasibility exercise before deciding whether salary sacrifice is right for them and their employees.

Another concern can be that it seems complicated, difficult for payroll, and a benefit that not many understand. And yet, they’re perfectly willing and able to administer salary sacrifice for childcare vouchers and Cycle to Work schemes.

In summary, while salary sacrifice arrangements can still be used with several employee benefits, the largest benefit for most employers and employees is realised by using salary sacrifice for pension contributions. The arrangement can generate employer savings, control costs and help their employees to boost their retirement savings.

We have experience supporting independent schools through the process of choosing and designing their pension schemes. If we can help you too, please get in touch.




Posted by Graeme Bell

Topics: Workplace Savings, dc pension schemes, occupational dc


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