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I'm contributing to a Workplace Pension.

  • For each £100 I earn (within limits) I contribute £5, and my employer contributes £3.

  • I pay 12% NI on my £5, so it costs me £5.60. My employer pays 13.8% NI on my £5, so their cost is £3.69.

  • The £8 contribution costs us £9.29 in total.

Salary Sacrifice into a SIPP, is free from NI:

  • If my employer paid £9.29 into my SIPP instead, my pension would be 16.125% bigger, at no cost to my employer.

Have I understood this correctly?

Have Workplace Pensions been deliberately set-up in a NI-inefficient way, in comparison with other pension arrangements that employers can make?

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Salary sacrifice does indeed have the beneficial effects that you have mentioned (assuming your earnings are above the relevant NI thresholds). Chiefly, it gives both you and the employer the opportunity to save the amount of the NI contribution – and as you point out, if the employer is magnanimous enough they could also choose to credit your pension with their own Class 1 NI saving.

However, Salary Sacrifice does come with some potential drawbacks that the individual might not be willing to accept (such as, the income level they would be able to declare for e.g. a mortgage application would be contractually reduced by a Salary Sacrifice arrangement) and you cannot usually change the arrangement within 12 months of it starting.

So as to whether Workplace Pensions have been deliberately set up in an NI-inefficient way – no, I would say that they have been set up in the standard way that works for most people. Yes, there is a way to make it more tax-efficient – but it depends on the employer being willing to make such arrangements through their payroll, the employee to be aware of it (through own research or through employer informing them) and for them to accept the possible detrimental effects of salary sacrifice.

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