The following Pensions Q&A provides comprehensive and up to date legal information covering:
Salary sacrifice (also called salary exchange) operates by varying an employee's terms and conditions of employment in relation to their pay. In effect, an employee agrees to give up the right to receive part of their earnings in return for the employer's agreement to provide the employee with some form of non-cash benefit. A non-cash benefit can include pension contributions where the amount that the employee gives up or 'sacrifices' from their pay is paid instead by the employer as pension contributions made on behalf of that employee into the pension scheme. As National Insurance Contributions (NICs) are determined in accordance with the remuneration which the employee actually receives, both the employer and employee will pay lower NICs as a result. Some employers may agree to pay part of their NICs savings into the employee's pension as well, although there is no obligation on employers to do this.
In practice, the employee must give up part of their entitlement to future earnings before it is treated as 'received' for employment income tax and NICs purposes. This is because once an employee's earnings are considered to be 'received', they are taxable as employment income and subject to NICs, even where no actual payment is paid over. This means that a salary sacrifice
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