Salary Sacrifice Pension: Do You Need to Claim Tax Relief?

Thinking about your pension and whether you're getting all the tax relief you're entitled to? If you're in a salary sacrifice pension scheme, the answer might surprise you. Many people wrongly assume they need to claim extra tax relief, but with salary sacrifice, the tax relief is usually applied automatically. Let's break down how it works, and when you might need to take action.

What is Salary Sacrifice (or Salary Exchange)?

Salary sacrifice, also known as salary exchange, is an agreement between you and your employer. You agree to give up part of your salary, and in return, your employer pays that amount as a contribution into your pension pot. Because your salary is lower, you pay less Income Tax and National Insurance. This is perfectly legal and is enshrined in UK tax legislation – specifically, Section 192 of the Finance Act 2004, which provides the legislative basis for registered pension schemes and their tax advantages.

The key thing to remember is that the tax relief happens before you even receive your salary. It's not like a standard pension contribution where you get tax relief added later. That’s why you usually don't need to claim anything back.

Salary Sacrifice vs. Relief at Source: What's the Difference?

It's easy to confuse salary sacrifice with other types of pension schemes, particularly those that use 'relief at source'. With relief at source, you make contributions from your net pay (after tax). Your pension provider then claims basic rate tax relief (currently 20%) from HMRC and adds it to your pension pot. If you're a higher-rate taxpayer, you then need to claim the additional tax relief from HMRC, usually through your self-assessment tax return or by contacting them directly. This is the crucial difference – with salary sacrifice, the tax relief is already factored in.

Think of it this way: salary sacrifice reduces your taxable income upfront. Relief at source adds tax relief after you've already paid tax.

How Salary Sacrifice Saves You Tax (with Examples)

Let's look at a couple of examples to illustrate the tax savings with salary sacrifice. We'll focus on someone earning over the £50,270 higher rate threshold for the 2024/25 tax year.

Example 1: Basic Rate Taxpayer Nearing Higher Rate

Imagine you earn £52,000 per year and contribute £4,000 to your pension via salary sacrifice.

• Without Salary Sacrifice: You pay Income Tax on £52,000. You’d be paying 40% tax on the portion of your salary above £50,270. You'd also pay National Insurance on the full amount.
• With Salary Sacrifice: Your taxable salary is reduced to £48,000 (£52,000 - £4,000). You now only pay Income Tax on £48,000, and no longer fall into the higher rate tax bracket. You also pay less National Insurance.

In this scenario, you save Income Tax and National Insurance. The pension contribution has effectively pushed you back into the basic rate tax band, saving you a significant amount of money.

Example 2: Higher Rate Taxpayer

Let's say you earn £70,000 per year and contribute £10,000 to your pension via salary sacrifice.

• Without Salary Sacrifice: You pay Income Tax on £70,000. You'd be paying 40% tax on the portion of your salary above £50,270.
• With Salary Sacrifice: Your taxable salary is reduced to £60,000 (£70,000 - £10,000). You now pay Income Tax on £60,000. The £10,000 contribution hasn't just gone into your pension; it's also saved you £4,000 in Income Tax (40% of £10,000) and National Insurance (typically 8% or 2% depending on your earnings). Your total tax and NI saving is therefore more than £4,000.

In both examples, the tax relief is applied automatically through the salary sacrifice arrangement. You don't need to claim anything extra from HMRC.

When Might You Need to Claim Additional Pension Tax Relief?

While salary sacrifice usually handles the tax relief automatically, there are a few exceptions:

• If you also make personal contributions to a different pension scheme using 'relief at source': In this case, you'll need to declare these contributions to HMRC to claim any higher-rate tax relief due on those separate contributions. The salary sacrifice pension is unaffected.
• If your employer makes a mistake: Although rare, errors can happen. Double-check your payslips to ensure the correct salary sacrifice amount is being deducted and that your taxable income is accurately reflected. If you spot an error, contact your employer's payroll department immediately.
• If you've made contributions in previous tax years and haven't claimed higher rate relief on relief at source pensions: You can usually backdate claims for up to four tax years. So, if you've only just realised you're entitled to higher-rate relief on past pension contributions (outside of salary sacrifice), it's worth investigating.

How to Claim (If You Actually Need To)

As we've established, you probably don't need to claim for tax relief on your salary sacrifice pension. However, if you do need to claim for relief at source contributions, here's how:

1. Self-Assessment Tax Return: If you already complete a self-assessment tax return, you can declare your pension contributions in the relevant section. This is the easiest method if you're self-employed or have other income to declare.
2. Contact HMRC Directly: If you don't complete a self-assessment, you can contact HMRC by phone or in writing. You'll need your National Insurance number and details of your pension contributions.
3. Check your payslips and P60: Ensure the figures you provide to HMRC align with your records.

Don't Miss Out: Are You REALLY Getting the Right Tax Relief?

While salary sacrifice simplifies pension tax relief, it's crucial to understand how it works to ensure you're not missing out on potential savings. It's also important to differentiate between salary sacrifice and relief at source pensions.

To double-check your situation and see if you might be entitled to any additional relief on other pension contributions, why not use our free calculator? It takes under two minutes to check your eligibility and could potentially save you thousands of pounds. Don't leave money on the table – check it out today!