Salary sacrifice (sometimes known as ‘salary waiver’) in the context of retirement planning is a contractual agreement to waive all or part of an employee’s salary in return for the employer contributing a preferential (equivalent) sum into their pension plan.

Salary sacrifice is about varying the employee’s terms and conditions as they relate to remuneration, and is a matter for agreement between the employer and employee.

To be effective, a salary sacrifice must be ‘given up’ before it’s subjected to tax or National Insurance Contributions (NICs). This allows the employee to save the entire amount of their sacrificed income in their pension plan free of tax and NICs.

There are also savings for an employer, as they don’t have to pay NICs on the employee’s sacrificed income. If the employer passes some or all of these savings on to the employee, they’ll benefit from even larger tax and NICs-free at no extra cost.

For these reasons, salary sacrifice could significantly enhance the long-term value of the employee’s pension plan, as well as allowing them to enjoy considerable savings.

However, salary sacrifice may not be appropriate for individuals with earnings of £150,000 as, in accordance with new pensions tax relief regulations for high earners, any amount of employment income foregone by salary sacrifice in return for an equivalent pension contribution, where the agreement was put in place on or after 22 April 2009, will be considered relevant income and could result in the application of a Special Annual Allowance charge that reduces the tax relief available.