Salary sacrifice is a contractual arrangement between you and the University whereby you agree to give up part of your salary in exchange for an equivalent pension contribution from your employer into your pension scheme.
The University automatically enrols staff who are joining USS or UoBGPP into salary sacrifice arrangement. This means that unless you choose to opt out of salary sacrifice or you earn less than the current pay protection limit (see below), you agree to a reduction in your salary equal to your pension contributions.
Your gross salary will be reduced by the amount of your pension contributions. The University will then pay this into the pension scheme as an employer contribution in addition to any contribution we would normally make.
By sacrificing some of your salary, it reduces the amount of national insurance both you and the University pay. It is important to remember that by agreeing to a salary sacrifice, you are agreeing to a change in the terms and conditions of your employment.
You do not have to participate in salary sacrifice. You can be a member of the USS or UoBGPP without joining salary sacrifice. To find out how you can opt out of salary sacrifice please see below.
What are the benefits?
Salary sacrifice can be a very cost-effective way of saving for your retirement. Depending upon your circumstances, salary sacrifice, when used for pension contributions, can save you money on National Insurance (NI) contributions when compared to paying employee pension contributions from your pay. As a result, your take home pay will increase but the amount of money invested in your pension scheme by you remains the same.
For example, if you earn more than the lower threshold for paying NI contributions (which is called the Primary Threshold and for 2021/22 is £9,568) you will save 12% on the amount of salary exchanged over this limit. If you earn more than the Upper Earnings Limit for NI contributions (which for 2021/22 is £50,270), you will save 2% on the amount of salary exchanged over this limit.
You should note that there is no income tax advantage. Pension contributions paid by an employee from their salary currently receive full tax relief. Pension contributions paid by salary exchange are also tax free because you did not receive this money as income.
How does it work in practice?
To illustrate how salary sacrifice might affect your salary and pension contributions we will look at an example case. John is paid an annual salary of £20,000. He pays £1,200 (gross) into his pension plan each year and the University pays £1,600, taking his total pension contributions for the year to £2,800.
With salary sacrifice, John would stop making contributions himself and agree to ‘exchange’ £1,200 of his salary for the University making contributions into his pension plan.
John’s salary would reduce to £18,800 and the University would pay the ‘exchanged’ amount (£1,200) into his pension plan, along with the £1,600 we already pay on his behalf.
|Before salary sacrifice (£)||After salary sacrifice (£)|
|John's pension contributions||1,200||0|
|Employer pension contributions||1,600||2,800|
|Total pension contributions||2,800||2,800|
|Take home pay||using salary sacrifice, John will pay lower NI contributions on his reduced salary which will increase his take home pay|
Who should participate?
Most members will benefit from joining salary sacrifice but there may be some for whom it is not advantageous; this is explained in more detail below.
If you decide you do not want to participate in salary sacrifice, you need to complete an opt out form. Please see more detail below.
Reducing your salary through salary exchange involves making changes to your contract of employment and it is important to be aware of the implications this may have. You should be completely sure salary sacrifice is the right option for you.
Who might not benefit from salary sacrifice?
Although most members will benefit from joining salary sacrifice, there are some who may not. We, therefore, have in place a pay protection limit to ensure employees are not adversely affected. Pay protection limit is set at a level of the personal tax allowance announced by HMRC for each tax year. This is £12,570 for tax year 2021/22.
If your annual salary falls below this limit you will be taken out of salary sacrifice automatically. If your salary increases to above the pay protection limit, you will automatically be opted back into salary sacrifice.
Members who may not benefit
Those who earn less than the current Lower Earnings Limit for NI. This is because you would not make any savings and may see your state benefits affected.
Those over State Pension Age do not pay any NI and as a result will not make an NI saving. However, you will still be included in salary sacrifice unless you choose to opt out.
The reduction in your salary could affect your entitlement to statutory benefits, such as the state pension, child and working tax credit and statutory sick pay. If you are in receipt of tax credits, state benefits or statutory payments, or think you may be in receipt in the near future, you should contact the relevant tax credits/benefits office before joining the pension salary sacrifice arrangement to clarify whether or not it may affect your eligibility for benefits and the payments. You will need to decide whether this will affect you and whether you wish to participate in Salary Sacrifice.
Salary Sacrifice Considerations and FAQs
National Minimum/Living Wage
A salary sacrifice arrangement must not reduce your cash earnings below the National Living Wage (if you are aged 23 and over) and the National Minimum Wage (if you are aged under 23), therefore if your earnings are at the national minimum/living wage level or close to this it is unlikely that you’ll be able to salary sacrifice your pension contributions and you will be taken out of salary sacrifice automatically.
For example, in tax year 2021/22, if you are aged over 23, you must have a full-time equivalent salary of approx. £16,956.71 / annum after the salary sacrifice; this is based on £8.91 / hr (NLW) x 36.5 hrs/wk x 52.14 wks / annum. This figure would be pro-rata according to hours and weeks worked.
Opting out of Salary Sacrifice
Please note that if you do not wish to salary sacrifice your pension contributions, this will not affect your eligibility to be a member of the pension scheme on a non-salary exchange basis.
Salary sacrifice will not affect any other salary-related payments or benefits that you may receive from the University. Your pension benefits, salary increases, bonuses and overtime will be calculated based on your salary before salary sacrifice (your ‘notional’ salary).
Your notional salary will also be the amount quoted in any personal official letters, for example mortgage letters, loan applications or job references and is the salary you should quote when required.
If you start receiving maternity pay, your salary sacrifice will remain the same whilst you are in receipt of occupational maternity pay at 100% of your basic pay. Your salary sacrificed amount will reduce proportionately when you start receiving reduced occupational maternity pay. Salary sacrifice will be suspended once you start receiving statutory maternity pay only. During this period the University will top up your pension contributions to the amount that you would have paid if you received a full salary. Once you stop receiving statutory maternity pay, your salary sacrifice will be suspended until normal pay resumes.
If you start receiving sick pay, your salary sacrifice will remain the same whilst you are in receipt of occupational sick pay at 100% of your basic pay. Your salary sacrificed amount will reduce proportionately when you start receiving reduced occupational sick pay. Salary sacrifice will be suspended once you start receiving statutory sick pay only. During this period the University will top up your pension contributions to the amount that you would have paid if you received a full salary. If you are not eligible for occupational or statutory sick pay; or if you stop receiving statutory sick pay because you used up the entitlement, your salary sacrifice will be suspended until normal pay resumes.
During any periods of unpaid leave all pension contributions will be suspended.
If I decide to opt out of pension salary sacrifice, can I opt back in?
Yes, you will be able to opt back into salary sacrifice. Complete the opt in form.
If I have been automatically opted out, can I choose to opt back in?
If you have been opted out of pension salary sacrifice it is unlikely that you will benefit from opting back in. However, if you are aware of a lifestyle change, for example an increase in working hours and you feel you may benefit, please complete the opt in form.
Will pension salary sacrifice affect my other salary sacrifice schemes?
You can participate in more than one type of salary sacrifice scheme, but if your salary reduces below the current pay protection limit or your earnings after salary sacrifice fall below the NMW/NLW you will automatically be taken out of the salary sacrifice scheme with the lower priority. The priority order of the salary sacrifice schemes currently offered by the University is as follows:
- Pension salary sacrifice
- Childcare vouchers salary sacrifice.
How long will the pension salary sacrifice arrangement last?
The University plans to operate a pension salary sacrifice arrangement for the foreseeable future. However, if tax or National Insurance law changes, or if it is no longer viable for the University as a business to operate salary sacrifice, it reserves the right to withdraw this pension salary sacrifice arrangement.
Considerations for Members of USS
Participating in salary sacrifice will have no effect on the pensionable salary used to calculate your pension and the University will continue to pay the full amount of pension contributions to USS based on your notional salary (salary before the salary sacrifice).
Refund Restriction and Opting Out of Salary Sacrifice
If you participate in salary sacrifice for three months or more and then leave the University or opt out of USS you will not be entitled to a refund of contributions from USS. Instead, you will maintain an entitlement to a deferred pension with USS, which you can choose to transfer to another pension provider.
If you would like the option of receiving a refund of contributions in the event of being in the USS pension scheme for less than 2 years, then you must opt out of salary sacrifice.
The University can refund salary sacrifice contributions only if you opt out within three months of joining the scheme.
Variable Time Employees
Variable time contributions are not paid via salary sacrifice, these are deducted from your pay before tax but after national insurance deductions.
Considerations for Members of UoBGPP
What if I’m a non-taxpayer?
Your pension provider (Aviva) can receive 20% basic rate tax relief from HMRC on your behalf and pay it into your pension pot, if you pay employee pension contributions using the conventional method on a relief at source basis (from your net pay). However, if you were to use salary sacrifice and give up some of your pay in return for an employer pension contribution, you would not receive this tax credit.
The 12% National Insurance (NI) contribution saving achieved by using pension salary sacrifice, is less beneficial to you than receiving 20% basic rate tax relief when you don’t pay tax. Therefore, non-taxpayers are better off paying pension contributions on a conventional basis using a relief at source method.
The University has put in place pay protection limit (see above) to prevent non-taxpayers from taking part in the pension salary sacrifice arrangement. This is to ensure that they are not disadvantaged.
You may still be entitled to membership of the UoBGPP pension scheme, but your contributions will be deducted from your salary using the conventional method (from your net pay).