Salary sacrifice for a director

Is a salary sacrifice scheme required?

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My client is a small close company with husband and wife directors. The company is owned 100% by the husband. His wife works part time in the business.

The husband takes a salary of £12,570 and his wife is paid £20,000 which is a genuine salary for genuine work carried out.

My client wants to reduce his wife’s salary to just £12,570 because she now has other income which would push her into higher rate tax. However, he wants to do this as a salary sacrifice arrangement and pay the difference of £7,430 into his wife’s personal pension scheme (not an employer scheme). He wants this to be shown on her payslips so that it doesn’t affect her gross salary for mortgage purposes.

I also understand there are also minimum wage issues to consider, which the salary after sacrifice must not drop below.

Assuming the minimum wage is still met, does anyone see any problem with doing the above?

I’ve not got involved with salary sacrifice arrangements or schemes before for any of my clients, so I just wondered if there is anything that my client needs to do, or can he just simply deduct the amount from his wife’s pay and pay that into her personal scheme. Or must some kind of formal scheme be set up for example?

Replies (35)

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JCACE
By jcace
27th Apr 2024 17:03

If an employee sacrifices part of their salary, that will affect their gross pay, and I would expect any lender to be aware of that.

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the sea otter
By memyself-eye
27th Apr 2024 17:07

It's that phrase 'for mortgage purposes' (which are what exactly?) that undermines their cunning plan.
Baldrick would be proud.

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RLI
By lionofludesch
27th Apr 2024 17:45

If it's shown as part of her gross pay, it is she who is making the contribution, not the employer.

With all the consequences that entails.

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By Paul Crowley
27th Apr 2024 17:50

Could the wife not just choose to pay net £5944 from her pay into the pension. HMRC will top it up with £1486

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Replying to Paul Crowley:
JCACE
By jcace
27th Apr 2024 18:08

Much more straightforward, with no need to reduce current salary. As long as the current salary is still commensurate with the level of work being carried out alongside her other work/commitments.

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By FactChecker
27th Apr 2024 19:34

When will people learn ... Salary Sacrifice is a *contractual* reduction in Salary.

So, aside of all sorts of other apparent misunderstandings (and needless complication as pointed out by Paul Crowley), it simply will NOT meet OP's only stated objective.
In other words, if (after all the relevant paperwork is completed) wife signs the SalSac Agreement and then claims the pre-SalSac salary to be in place when applying for a loan or mortgage ... then that would be simple fraud!

OP: if you've "not got involved with salary sacrifice arrangements or schemes before for any of my clients" then don't just jump in.
It's not massively complicated but there's a lot of legislation surrounding it and it's very procedural in terms of paperwork (with loads of restrictions that restrict future changes) ... it certainly isn't just a verbal agreement to pay part of salary to a pension scheme - and will often not be the most efficient way to do things anyway.

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By gillybean04
27th Apr 2024 19:57

Edited: Nevermind, they'd need a time machine.

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RLI
By lionofludesch
27th Apr 2024 20:31

Not sure NMW will be a problem for a director.

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Replying to lionofludesch:
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By FactChecker
27th Apr 2024 23:12

That's often (maybe usually) the case, but see https://www.gov.uk/hmrc-internal-manuals/national-minimum-wage-manual/nm... for why not always.

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Replying to lionofludesch:
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By gillybean04
28th Apr 2024 09:12

That was what I was thinking initially - that NMW wasn't in point. But I then remembered there were changes to NMW for a family company so second guessed myself and edited. By the time I remembered to look up the changes my 30 minutes was up.

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By Tax Dragon
28th Apr 2024 09:45

You need a time machine.

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By rmillaree
28th Apr 2024 12:33

"In other words, if (after all the relevant paperwork is completed) wife signs the SalSac Agreement and then claims the pre-SalSac salary to be in place when applying for a loan or mortgage ... then that would be simple fraud!"

ref fraud - no idea where you are getting that from Factchecker. If gross pay salary sacraficed and taxable pay are shown on payslips and payslips are provided - surely thats just business as usual - its the lenders choice whether they use taxable pay gross pay or some other metric !! - so its not as if

the random link below suggests some lenders may be more flexible than simply using taxble pay too? - if one has doubts best bet to check with specilaist in that area rather than ask us acountants !

https://growingmoneytrees.org/2024/02/07/does-salary-sacrifice-affect-my...

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Replying to rmillaree:
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By FactChecker
28th Apr 2024 16:54

"ref fraud - no idea where you are getting that from Factchecker" ... by having picked my words very precisely.

You've correctly quoted the full extract of what I said, but appear not to have read (or understood?) the entirety of it.
So for the avoidance of misunderstanding, a breakdown of what I said:

1. (pre-condition) = "if (after all the relevant paperwork is completed) wife signs the SalSac Agreement" = a formal SalSac Agreement has been completed/set-up.

2. (action) = "then claims the pre-SalSac salary to be in place when applying for a loan or mortgage" = enters the no-longer-contractual salary in that part of the mortgage application form which requests applicant to enter current salary.

3. (consequence) = "that would be simple fraud" = if you enter untrue values in such a form with the intention of obtaining something that would not have been offered if you had entered the correct value, then that IS fraud.

Whilst I take your point that many application forms ask for different items of data (and may use a different form of words), that doesn't change the accuracy of what I said. [I didn't say that SalSac MUST lead to Mortgage application fraud - but that it will if false information is entered on the application.]

FWIW, a Payslip should NOT show the pre-SalSac salary ... the whole point is that it no longer exists contractually after the Agreement has been put in place. And it most certainly should NOT be included within items such as 'taxable pay'.

I quite agree that " it's the lenders choice whether they use taxable pay gross pay or some other metric" - which again, however, doesn't contradict what I said.
In general the lazier (often cheaper) lenders tend to have rigid criteria, whilst others are prepared to take a more 'rounded' view (in return for higher fees).

BUT, going full circle, OP made it quite clear that the intention of using SalSac was to save HR tax (fair enough) AND "shown on her payslips so that it doesn’t affect her gross salary for mortgage purposes."
And that was my red flag ... because by definition SalSac WILL affect her gross salary (leaving the suggestion that OP is hoping to 'misdirect' a mortgage application).

Out of interest, do you disagree with Paul Crowley's suggestion?
In general, however much minor detail varies between different lenders, they are interested in two main factors ... how 'guaranteed/regular' are your total earnings, and what 'committed/regular' liabilities have to be met out out of those - in essence how 'affordable' will you find the repayments (even if interest increases).

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By rmillaree
28th Apr 2024 18:07

"FWIW, a Payslip should NOT show the pre-SalSac salary ... the whole point is that it no longer exists contractually after the Agreement has been put in place.

i have seen plenty of payslips where the gross salary (pre-ss deduction) salary sacrafice deduction amount and taxable pay all being shown - example linked on the net here

https://getpenfold.com/employer-tools/salary-sacrifice-payslip

"And it most certainly should NOT be included within items such as 'taxable pay'.""
agreed - gross pay less salary sacrafice = taxable pay.

"And that was my red flag ... because by definition SalSac WILL affect her gross salary (leaving the suggestion that OP is hoping to 'misdirect' a mortgage application)." -
it sounds like when you are talking about "gross salary" you are talking about "taxable gross". When i am talking about gross pay i am referring to amount pre ss deduction.

"Out of interest, do you disagree with Paul Crowley's suggestion?"

no i agree with Paul crowleys comments and mostly agree with you comments that the op may find this cunning plan will fail with many normal lenders - my only point was that per comment on the net it seems like theer may be some scope for some lenders to be more flexible than the blunt instrumnet that is defaulting to "taxable pay"

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Replying to rmillaree:
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By FactChecker
28th Apr 2024 21:02

Happy (and not surprised) to hear that we're in broad agreement - and, if not clear from my previous comments, I fully agree with your final para (because that enters the realms of individual lenders with different policies/procedures).

But your link is a wonderful example of why I tend to get agitated on this topic (in terms of the woeful lack of understanding by most employers, that is then aided and abetted by those who should know better - whether scheme providers or suppliers of Payroll software etc).

It opens by saying: "A salary sacrifice payslip shows the details of your salary after salary sacrifice contributions have been deducted" - which is a perfect encapsulation of how wrong someone can get the subject:
- EE doesn't make 'salary sacrifice contributions';
- there are therefore no 'contributions .. deducted'.

It then goes on to talk about how the payslip: "allows you to keep track of your contributions towards the scheme" - which is complete garbage (suggesting as it does that you are paying off a balance)!

And continues in this vein ... referring to 'Salary Exchange' (a U.S. concept) and to 'Your Gross Pay: This is the amount of money you earned before any deductions were made, including your salary sacrifice contributions';
... which is we entered the fray!
Whatever one's definition of Gross Pay it should NEVER include an already sacrificed part of salary (which by dint of the signed Agreement is an amount to which the EE no longer has any contractual right).

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Replying to FactChecker:
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By rmillaree
29th Apr 2024 09:31

the facts are its common that salary sacrafice adjustments ARE shown on payslips , i dont dispute any of your technical points here ref contracural ararngements - we cant simply ignore that these items do show up on the payslips though.

https://www.brightpay.co.uk/docs/23-24/automatic-enrolment/applying-a-sa...
https://www.iris.co.uk/support/knowledgebase/kb/11221/

"Whatever one's definition of Gross Pay it should NEVER include an already sacrificed part of salary (which by dint of the signed Agreement is an amount to which the EE no longer has any contractual right)."

lets look at hmrc's take on this

If reduced salary/wages are payable then these changes should be reflected on the payslip. However, if you ask to see a post sacrifice payslip you may see that the figure of gross remuneration on the payslip is unaltered. This does not automatically mean that the salary sacrifice is ineffective. If the employment contract has been effectively varied the employee’s entitlement to remuneration has changed. The contractual agreement is evidence of change and figures on a payslip do not invalidate that.

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim42770

specifically this bit

"However, if you ask to see a post sacrifice payslip you may see that the figure of gross remuneration on the payslip is unaltered. This does not automatically mean that the salary sacrifice is ineffective."

is this not accepting the realities here that the contract and details behind the scene are what matters and that the payslip may show stuff that is simply presented to make line item adjusts clear for both parties - while at the same time muddying the waters ref what they are calling gross pay?

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Replying to rmillaree:
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By Tax Dragon
29th Apr 2024 10:14

Your EIM extract paraphrases to "we've been told some payslips are incorrect. In these cases look at the other evidence to determine the tax position."

As advisors, we should be helping our clients to do things correctly. The manual extract doesn't apply when payslips are correct.

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By Yossarian
28th Apr 2024 10:03

Bear in mind that some mortgage lenders, when dealing with owner/directors of close companies, will specifically ask for the details of employer pension contributions, and take that into account as 'income' alongside salary and dividends. Therefore I wouldn't waste time coming up with a convoluted way of trying to make the income look better on the payslip when it may not be necessary for mortgage purposes.

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By FrogHappy
29th Apr 2024 09:17

Thanks to everyone for your input over the weekend.

I agree that I will advise my client steer clear of that option.

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By rmillaree
29th Apr 2024 09:50

i think you are missing the point here - salary sacrafice could be by far the most tax efficient option here. You could as easily be [***] your client over telling them not to go down this route as by telling them to go down this route without understanding the full details. Sometimes either you (on clients behalf) or client simply need technical specialist to look at something to see whether that is feesible or not - obviously that will cost wonga and paying that wonga might be what puts them off. this is complicated by the advise being tax related and probably "ifa"/mortgage financing related - its always extra complicated when those 2 items may be at odds with each other.

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Replying to rmillaree:
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By FrogHappy
29th Apr 2024 10:12

Perhaps I badly worded my response.

I agree with your comments, it could be more tax efficient than paying a private contribution (which is the obvious alternative), but I will also be highlighting to my client that it may not be the most straight forward option and may not achieve the objective for mortgage purposes, and it wouldn't therefore be my own preference, but that ultimately it is up to them what they choose to do, but that I will not be getting involved with advising on salary sacrifice which I have insufficient experience of. If they want to do that, they would need to take further advice.

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By accountaholic
29th Apr 2024 23:18

A practical point on all this is that employers often need to retain the pre-sacrifice salary figure fo the purposes of comparing employees. It’s easy at the start to know that employee A has salary of X but has sacrificed some, whereas employee B has salary Y. Fast forward a few pay rises and promotions, and fair comparisons need to know the original “unadulterated” salary. Depending on software, the practical way of achieving this may be the software maintaining and showing on the payslip the higher figure, and the contractual negative figure.

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By accountaholic
29th Apr 2024 23:19

A practical point on all this is that employers often need to retain the pre-sacrifice salary figure fo the purposes of comparing employees. It’s easy at the start to know that employee A has salary of X but has sacrificed some, whereas employee B has salary Y. Fast forward a few pay rises and promotions, and fair comparisons need to know the original “unadulterated” salary. Depending on software, the practical way of achieving this may be the software maintaining and showing on the payslip the higher figure, and the contractual negative figure.

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Replying to accountaholic:
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By FactChecker
30th Apr 2024 00:19

Not sure how you see your "practical point" having relevance if an employer (or particular Payroll software) generates incorrect Payslips.

As per TD's post of 29th Apr 2024 at 10:14:
"As advisors, we should be helping our clients to do things correctly."

FWIW I agree it is sensible for an ER to retain a note of the pre-sacrifice salary - but not primarily for the reason you give.
More commonly it will be because some parts of the remuneration package, such as pension, *may* (depending on Employment T&Cs) retain their link to that figure rather than to the post-sacrifice figure.
So a decent Payroll package will allow an individual's Notional Salary to be held - and that figure (which will not break all the rules I've indicated above) can be used by Payroll as input to sub-routines (e.g. for calculating Pension contributions) but without appearing as, or being included within, Gross or taxable earnings.
Whatever the reason, the ER can then run reports based on NS (or any other item) to their heart's content.

This is just one of many entry points into what might be considered Advanced Payroll Processing (and its cousins Remuneration and Reward Modelling) - but it does NOT require untrue or misleading figures to be shown on the Payslip

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By rmillaree
30th Apr 2024 08:36

"So a decent Payroll package will allow an individual's Notional Salary to be held - and that figure (which will not break all the rules I've indicated above) can be used by Payroll as input to sub-routines (e.g. for calculating Pension contributions) but without appearing as, or being included within, Gross or taxable earnings."

imho the all important figure here is the taxable pay for most accountants completing tax returns -

whatever you would like to see on the payslips factchecker its a matter of fact that many payrolls will sometimes give the illusion the gross pay figure is showing as pre ss deduction.

"This is just one of many entry points into what might be considered Advanced Payroll Processing (and its cousins Remuneration and Reward Modelling) - but it does NOT require untrue or misleading figures to be shown on the Payslip"

sigh

is the text below not enough for you to accept that IF an employer chooses hmrc will allow the pre ss figure to be shown as gross pay ?v - as ultimately the contractual ararngemenst confirm what is needed - and for tax purposes taxable pay is what it should be.

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim42770

per hmrc
Payslip information
If reduced salary/wages are payable then these changes should be reflected on the payslip. However, if you ask to see a post sacrifice payslip you may see that the figure of gross remuneration on the payslip is unaltered.This does not automatically mean that the salary sacrifice is ineffective.

We agreed that where the employment contract has been effectively varied the format of the payslip will not be used to challenge the effectiveness of the arrangement.

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Replying to rmillaree:
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By FactChecker
30th Apr 2024 13:02

Can't see why you're so hung up on thinking that I'm hung up on a point that I've never claimed.
For the avoidance of doubt, I've never said that some Payrolls *don't* display the incorrect values or labels on their payslips - merely that they *shouldn't* (for all the reasons I've given).

And, as TD said (on 29th Apr 2024 at 10:14) in response to your previous reference to that EIM extract:
- it paraphrases to "we've been told some payslips are incorrect. In these cases look at the other evidence to determine the tax position."
- As advisors, we should be helping our clients to do things correctly. The manual extract doesn't apply when payslips are correct.

The only point on which we appear to be in disagreement is that I don't see why the fact that some Payroll's deliver incorrect Payslips means that the ER shouldn't be made aware of that incorrectness ... whereas you are happy to accept it because HMRC will (currently) endeavour to work around that incorrectness.

However, with regard to this thread none of that was material. The issue was that OP seemed to be openly hoping to fool the potential mortgage provider on the back of that payslip confusion ... which was definitely not a good idea.

Oh, and that 'sigh' ... sorry if I bored you, but that section of mine you repeated seems to have flown over your head - in that it had nothing at all to do with your continuing saga of picking away at my Payslip rants.
It was picking up on accountaholic's quite separate point about the usefulness of keeping a record of pre-sacrifice values (for issues more related to remuneration modelling & management) - which is why I introduced the topic of Notional Salary (an accepted methodology with a lengthy pedigree), but which has nothing to do with the topic that so irks you.

Shall we leave it there, as I don't see anything useful being added for any other readers?

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By rmillaree
30th Apr 2024 13:36

apologies if i misread your earlier posts - agreed probably time to just about wrap this is in

"The only point on which we appear to be in disagreement is that I don't see why the fact that some Payroll's deliver incorrect Payslips means that the ER shouldn't be made aware of that incorrectness ... whereas you are happy to accept it because HMRC will (currently) endeavour to work around that incorrectness."

happy to disagree over correctness or not ref payslips - in that regard the hmrc guidance i am sure you will agree is pretty clear that doing it the way some employers do it is seen to be acceptable by hmrc - that being the case i dont see that the employers are doing anything wrong if hmrc have formally accepted that they will accept that stance.

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By Tax Dragon
30th Apr 2024 13:47

In relation to your "i am sure you will agree is pretty clear" onwards and it being acceptable to HMRC, fwiw i don't agree that that's what HMRC means. HMRC's intention is to ensure that tax is applied correctly (and NMW/NLW complied with). There's no "formal acceptance" that it's OK to get your payslips wrong. There's guidance for HMRC staff on what to do and not do in cases where the payslips are wrong. Primarily, not to rely on incorrect payslips if the salary reduction has otherwise been correctly implemented and is evidenced.

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By rmillaree
30th Apr 2024 14:10

with regard to it being wrong - if the format being used is agreed to be acceptable by hmrc then my opinion is the employer is doing nothing wrong - in their explicit statement hmrc have stated here that they do not have a problem with such payslips so long as the detail is being done right. You might want to call it wrong but imho if hmrc accept the situation then i will stick to my viewpoint the payslips are just fine and dandy.

the danger here lies in us as acountants presuming that payslip will be / must be must be in a specific format type when clearly the reality on the ground is not that simple - in that regard taxable pay is always pretty clear but gross pay is pretty murky.

Note hmrc had the chance to stick to their guns here and say the payslip formats are not acceptable if they wanted to - they clearly didnt go down that route.

imho the position taken by hmrc is pretty sensible and the guidance here pretty clear and transparent.

Thats just my viewpoint - i understand you may still see it as being wrong - each to their own in that regard.

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Replying to rmillaree:
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By Tax Dragon
30th Apr 2024 14:58

Doing it as you suggest is to invite HMRC to request copies of the revised contract etc. Which is fine - so long as there is a revised contract and everything apart from the payslips has been done correctly. Whereas, as someone said above, if the payslips are done as FC suggests then your manual extract doesn't apply and HMRC's accommodation of 'alternative' methods of preparing payslips is unnecessary.

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By rmillaree
30th Apr 2024 15:27

"Doing it as you suggest"

i am not suggesting it should be done any way - i am just dealing with the facts that some companies do do it that way and that way is clearly done with the explicit approval of hmrc as long as they are doing it correctly.

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Replying to rmillaree:
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By Tax Dragon
30th Apr 2024 17:11

As you know, because I've already said (and we're hung in a loop, so I too am out after this), I agree with you up to "and" and disagree with everything from then on.

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RLI
By lionofludesch
30th Apr 2024 14:27

Surely this stuff is better kept on a spreadsheet outside the formal payroll system.

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By FactChecker
30th Apr 2024 19:03

You'd think, huh? Simplest is often the best (and least likely to cause problems).

My earlier point (which seems to have caused confusion of its own) was that 'bigger' Payroll systems will often hold loads of data that is not a direct requirement for processing payroll, but can be used for more comprehensive reporting (including what's shown on a Payslip).
One example from my own system was a series of 'from/to date' parameters (12 of them if I recall after all this time) that could be associated with groups of pay elements ... thereby generating 'for free' the YTD figures for that pay component, even if some were for tax year, some calendar year, some academic year, some pension scheme year, some holiday year, and so on.

Of course at that point one is straying beyond the boundary of 'pure payroll' into realms often considered the domain of HR or Finance - and what data is held where becomes ever less important to users (and more important to system designers) as those systems are integrated and share databases. A whole different story ...

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John Hextall
By John Hextall
01st May 2024 10:29

Salary sacrifice can be a good idea because of savings in NI contributions on both sides and, by some mathematical trickery, you end up with more going into the pension scheme for less cost. On the downside, it reduces your gross pay which can cause issues with mortgage applications; and also you are not allowed to sacrifice any amount that takes you below the minimum wage. The minimum wage for 40 hours a week is currently about 24k so it's probably not a good idea in this situation. You might get the result you want simply by making a large pension contribution direct from the 20k salary although this does depend on what questions the mortgage broker asks.

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