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My company are starting a scheme where I reduce my gross salary by the amount I pay into our pensions. They increase their pension contribution by the same amount, saving us both National Insurance and resulting in a small increase to my net pay, as well as a further company contribution into my pension based on the NI savings they make.

I have a normal full time job, receive some child benefit and will soon want to start purchasing childcare vouchers. I think that Salary Sacrifice will reduce the level of tax I need to pay on child benefit as well.

What are the downsides or potential issues with these schemes?

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The Money Advice Service mentions some of the downsides. Basically it comes down to the fact that salary sacrifice does literally reduce your gross salary figure, so anything calculated off that figure is also potentially reduced. That includes tax (yay) but potentially also beneficial things (boo).

Specifically they mention:

  • life cover provided by your employer (aka death in service benefits). This will typically pay out a certain multiple of your gross pay.
  • Maternity pay, again calculated off your pay
  • Mortgage applications
  • State pension entitlement
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Mortgage application? Doesn't the bank look at your gross income? In the US, a 401(k) deposit is never cited as a problem for loan limits. – JoeTaxpayer Aug 4 '14 at 11:52
A 401(k) payment isn't really an equivalent to salary sacrifice. I'm not sure if there is a direct equivalent in the US. AIUI salary sacrifice literally contractually reduces your top-line gross income, and mortgage lenders often will not consider the thing you get in return (which will be some kind of non-cash benefit) when assessing your application. It's certainly possible to find advice along those lines on multiple reputable UK financial sites. – Nigel Harper Aug 4 '14 at 12:21
You're welcome Joe. It's certainly an important one to be aware of, especially since the UK mortgage market is has recently tightened up in terms of income multiples and affordability calculations. – Nigel Harper Aug 4 '14 at 13:01
Thank you Nigel. I was able to check with my employer on a couple of the points - they provide a letter stating your pre-sacrifice "Reference Salary" for mortgage purposes, and Death In Service is also based on the Reference Salary. – conradj Aug 4 '14 at 13:22
I'd also expect to state my pre-sacrifice salary on a mortgage application, and be able to back that up with a payslip that would say that - they are typically arranged with your real salary as the starting value, and then "gross" deductions for the salary sacrifice aspects. – Ganesh Sittampalam Aug 4 '14 at 18:33

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