# Tax savings on employer contribution to pension scheme

Consider the following examples (numbers were calculated from tax.service.gov.uk).

Annual salary: £20000 Income tax: £1498 National insurance: £1260 Total tax: £2758

Annual salary: £60000 Income tax: £11498 National insurance: £5060 Total tax: £16558

Do these mean that if I draw a salary of £60000 I would end up saving in taxes £16558 - £2758 = £13800 if I have the employer contribute £40000 to a pension scheme instead of paying me directly?

What is the difference between such an employer contribution and a salary sacrifice? Also, do I have to contribute the entire £40000 from my salary or does the employer contribute a part of it?

• I think you are getting confused with employer contribution and salary sacrifice. Salary sacrifice is what you contribute to your pension and employer contribution is what your employer contributes. The employer contribution usually matches or is within a few percent of your contribution e.g you contribute 6%, your employer contributes 8% but is often capped for example if you contributed 25%, your employer contribution may still only be 8%.
– Jsk
Sep 28, 2020 at 9:27
• @Jsk Thank you. I was indeed confused between the two. Sep 28, 2020 at 9:33
• @Jsk Does this mean that for a hypothetical example where the employer contribution is capped at, say, 8% of my gross salary, say £60K, amounting to £4.8K if I contribute £35.2K to reach £40K, my taxable income would become £24.8K (60-35.2)? Is the employer's contribution separate from the promised gross salary? Sep 28, 2020 at 10:30

In a traditional pension scheme, every month you pay X amount into your pension and your employer pays Y amount. Since pension contributions are tax-free, you pay no income tax on X. Y was never your income; it comes out of the employer's pocket, and so has no effect on income tax.

In a salary sacrifice scheme, you agree to take a pay cut of X. Your employer then pays X+Y into your pension. Since you have taken a pay cut, your income tax goes down accordingly.

Normally, you get to decide how much X is. But you aren't allowed to take such a large pay cut that you are earning less than the minimum wage. Every employer has their own rules for calculating Y. Since Y is never your income in either scheme, it is not relevant for income tax purposes.

When it comes to income tax, the two systems end up pretty much the same. The main advantage of salary sacrifice is that the employer's National Insurance payments are based on your salary. So if you take a pay cut, they pay less tax. Most employers will pass at least some of that tax cut to you by paying a little more into your pension.

• Thank you. Is Y separate from gross salary? Does this mean that for a hypothetical example where the employer contribution is capped at, say, 8% of my gross salary, say £60K, amounting to £4.8K if I contribute £35.2K to reach £40K, my taxable income would become £24.8K (60-35.2)? The minimum wage is about £18K/annum. Sep 28, 2020 at 10:22
• @user2371765 That's up to the employer. Many schemes will match the amount you put in, but only up to a limit. You would need to check the documentation of your pension scheme to find out what that limit is. Your example looks right to me. Sep 28, 2020 at 12:12

Your employer can choose to have their pension be of the salary sacrifice type.

The difference to employees with a salary sacrifice scheme is that their contributions to the pension do not attract National Insurance i.e. the money paid into the pension is completely tax free.

Whether the scheme is salary sacrifice or not, your employer can choose to make contributions to your pension scheme on your behalf in addition to your normal salary. It depends on the terms of their specific scheme how much those contributions are and what you'd need to contribute in order for them to contribute anything. Some schemes are tiered i.e. the more you contribute, the more the employer contributes up to some stipulated maximum employer contribution.

• Thank you. Does this mean that for a hypothetical example where the employer contribution is capped at, say, 8% of my gross salary, say £60K, amounting to £4.8K if I contribute £35.2K, my taxable income would become £24.8K (60-35.2)? Is the employer contribution in addition to the gross salary that the employer pays out? Sep 28, 2020 at 9:40
• Employer contributions to pensions are in addition to your normal salary. Sep 28, 2020 at 10:56