Salary sacrifice pension calculator

Recently, I was discussing pension contributions and National Insurance (NI) with my father. I already knew that increasing one's personal pension contributions decreases the amount of income tax, NI, and student loan repayments (if applicable) paid. This is due to the fact that when contributions are made using a salary sacrifice scheme, the contribution reduces the taxable salary of the employee.

At the time of writing (May 2024), an employee pays income tax of 20% on all earnings between £12,571 and £50,270. (Most) employees also pay national insurance contributions of 8% of earnings between £242.01 and £967 a week. Student loan repayments for somebody with a plan 2 loan would pay 9% of any earnings over £27,295. Together, this equals 37% - meaning for every £100 an employee adds to their pension, their reduction in take home pay is only £63, assuming their salary is within the aforementioned limits. Salaries above or below these thresholds have slightly different calculations, which can be found on the gov.uk website.

Use of the calculator

The calculator has an initial area to calculate the following data:

• Annual income tax
• Annual NI payments for employee and employer
• Salary after pension, income tax, and NI (take home salary)
• Total pension contributions

However, this calculator also aims to explain an innovative scheme that can be used to encourage larger employee pension contributions. When employee pension contributions are increased, the employer pays less NI. Encouraging employees to increase their contributions increases their effective overall renumeration, and decreases employer costs. Therefore, this UI breaks down how giving 50% of the employer NI savings to the employee in the form of additional pension contributions can benefit both employee and employer.

A breakdown of the savings for the employer and employee are calculated in a table, based on the new pension contribution.

Finally, variables can be altered to show how much money a company could save by using such a scheme, assuming the scheme indeed encourages employees to increase contributions. The variables to be altered are:

• Average salary (of employees at relevant company)
• Number of employees
• Percentage of employees increasing contributions
• New personal pension contributions as a percentage of gross salary
• Standard deviation of salary values in the underlying log-normal distribution.

The company saving based on all variables selected is calculated, along with a graph showing the estimated distribution of salaries at the company.

Disclaimer

The data and opinions presented in this calculator are for illustrative purposes only, and should not be taken as financial advice. I am not a financial advisor, and the information presented may not be accurate or up-to-date. Please consult a suitably qualified financial advisor before making any financial decisions.