Tax savings

With Salary Sacrifice Shared Cost AVCs, you agree with your employer to reduce your pay. In return, your employer will pay an amount equal to the reduction in your pay, into an AVC pot in your name. This will reduce your earnings and you'll pay less income tax and National Insurance, depending on your personal circumstances (as you can see below, for a 20% rate taxpayer paying 8% NI). For more information about the rate of National Insurance visit the HM Revenue & Customs website.

You’ll also have to contribute at least £1 each time your employer pays your Salary Sacrifice contributions. If you're a 20% rate taxpayer, a £1 contribution will cost you £0.80. The £0.20 you'd pay in income tax would go into your AVC pot instead. If you pay tax at a higher rate, the cost to you will be even less. You’ll normally make income tax savings on the minimum £1 contribution, but not National Insurance savings.

If you don't pay tax, you won't have been benefiting from tax savings on your pension contributions up to 5 April 2024. The Government has introduced arrangements for individuals who are not paying tax on their earnings to claim tax relief on their employee contributions to the scheme. This applies to the minimum £1 contribution paid by you from 6 April 2024 onwards, but does not apply in respect of salary you are exchanging for an employer contribution to your pension. As a result, if you're not paying any tax and are exchanging salary for an employer contribution to the scheme you will not have tax relief on the salary exchanged.

You will need to contact HMRC to arrange this tax rebate. Claims will be processed in the tax year following the year claimed, i.e. claims for the current tax year would be processed by HMRC in the next tax year.

The process is simple, and it's all done for you by your employer. Salary Sacrifice Shared Cost AVCs may not be suitable or possible for some members. If you pay salary sacrifice shared cost AVC payments, your salary sacrifice payments cannot cause your annual pay to fall below the National minimum Wage / National Living Wage. However, you might be able to increase your employee contribution alongside this – you will need to pay at least £1.00 per pay period (weekly, monthly). Which will be deducted from your salary before tax as an employee contribution for each salary payment made to you. The remainder will be paid as an employer contribution and your pay will be reduced by the same amount through salary sacrifice. If you need more information on this, your employer can provide you with further details of how salary sacrifice works in their salary sacrifice shared cost arrangement.

Regular AVCs are taken from your pay before tax, so the money you’d normally pay as income tax will automatically go into your AVC pot instead, as you can see below. If you pay tax at a higher rate, your tax savings will be higher. If you don't pay tax, you won't benefit from tax savings.