Car Salary Sacrifice & Your Pension

In the realm of employee benefits, salary sacrifice schemes have become increasingly popular, offering a tax-efficient way to acquire goods and services. One such scheme is the car salary sacrifice arrangement, which allows employees to exchange a portion of their gross salary for a company car. A common question that arises with these schemes is whether the sacrificed salary is pensionable. This article aims to demystify this aspect, particularly for members of pension schemes, and explain the implications for your retirement savings.

What is Car Salary Sacrifice?

A car salary sacrifice scheme is an arrangement where an employee agrees to give up a part of their salary in return for a non-cash benefit – in this case, a company car. This arrangement is structured to provide tax and National Insurance (NI) savings for both the employee and, in some cases, the employer. By reducing your gross salary, you pay less income tax and NI. Similarly, the employer can also benefit from reduced NI contributions, as these are typically calculated on the reduced gross salary.

Is Car Salary Sacrifice Pensionable?

Generally, and as indicated by the provided information, car salary sacrifice is typically not pensionable. This means that the amount of salary you sacrifice for the company car is deducted from your gross pay before your pension contributions are calculated. Consequently, your pensionable earnings – the figure upon which your pension is built – will be lower.

Let's break down what this means for your pension:

• Reduced Pensionable Pay: Your pensionable earnings are the amount of your salary that is used to calculate your pension benefits. When you enter a car salary sacrifice scheme, the sacrificed amount is removed from this calculation.
• Impact on Pension Accrual: Most pension schemes, especially Defined Contribution (DC) or Career Average Revalued Earnings (CARE) schemes, calculate your pension contributions based on a percentage of your pensionable pay. A reduction in pensionable pay directly leads to a lower amount being contributed to your pension, both by you and potentially by your employer (if their contribution is also a percentage of your salary).

Example: CARE Pension Scheme

The information provided gives a specific example related to a member in the Main Section of a pension scheme, likely a CARE scheme. It states: "For a member in the Main Section of the scheme, their CARE pension builds up at the rate of 1/49 of their pensionable pay each year."

This means that if your pensionable pay is £30,000 per year, your CARE pension would build up by £30,000 / 49 = approximately £612.24 per year. If you enter a car salary sacrifice scheme and sacrifice £5,000 per year, reducing your pensionable pay to £25,000, your pension would then build up by £25,000 / 49 = approximately £510.20 per year. This illustrates a direct reduction in your annual pension accrual.

Comparison Table: Pensionable vs. Non-Pensionable Salary Sacrifice

To further clarify, let's consider a hypothetical scenario:

As you can see from the table, the £5,000 sacrificed for the car directly reduces the pensionable pay, resulting in a lower annual pension accrual.

Why is Salary Sacrifice Typically Non-Pensionable?

Pension regulations and scheme rules are designed to ensure that contributions and benefits are calculated on a consistent and fair basis. When an employee voluntarily gives up a portion of their salary for a non-cash benefit, that portion of the salary is no longer considered 'earnings' in the traditional sense that are available for pension contributions. The primary purpose of salary sacrifice is to gain tax and NI advantages on the sacrificed amount, and this is achieved by reducing the taxable and NI-deductible salary. Pension contributions are typically calculated on the 'reduced' salary after the sacrifice has been made.

Implications for Your Retirement Planning

Understanding that car salary sacrifice is non-pensionable is crucial for effective retirement planning. Here are some key implications:

• Lower Retirement Pot: Over time, the reduced contributions can lead to a smaller pension pot upon retirement. This is particularly relevant for Defined Contribution schemes where the final pot size depends on contributions and investment growth.
• Impact on Defined Benefit Schemes: For Defined Benefit (DB) schemes, where your pension is based on your salary and length of service, a lower pensionable salary means your pension entitlement will be calculated on a lower figure, potentially resulting in a lower retirement income.
• Employer Contributions: If your employer matches your pension contributions or contributes a fixed percentage of your salary, their contribution will also be reduced if it's based on your pensionable pay.
• Tax and NI Savings vs. Pension Growth: While you gain tax and NI savings on the sacrificed amount, you must weigh this against the potential long-term impact on your retirement income. For some individuals, the immediate savings might be more beneficial, while for others, maximising pension growth is the priority.

Maximising Your Benefits with Salary Sacrifice

If you're considering a car salary sacrifice scheme, it's wise to consider how to mitigate the impact on your pension:

• Voluntary Contributions: You might consider making additional voluntary contributions (AVCs) to your pension to compensate for the reduced accrual. However, check your scheme rules regarding AVCs and their tax treatment.
• Personal Pension: Explore the possibility of contributing to a personal pension plan (like a SIPP - Self-Invested Personal Pension) alongside your company scheme. Contributions to a personal pension receive tax relief, which can help boost your retirement savings.
• Review Your Financial Goals: Regularly review your overall financial and retirement goals. Assess whether the benefits of the car salary sacrifice scheme align with your long-term objectives.
• Seek Financial Advice: Consulting a qualified independent financial advisor can provide personalised guidance on whether a car salary sacrifice scheme is right for you, considering your specific financial situation and retirement aspirations.

Frequently Asked Questions

Q1: Will my State Pension be affected by car salary sacrifice?

Generally, the State Pension is based on your National Insurance contributions. While salary sacrifice reduces your NI contributions, it typically only affects the State Pension if your earnings drop below the Lower Earnings Limit (LEL) for NI. If your gross salary remains above the LEL even after sacrifice, your entitlement to the State Pension should not be affected. However, it's always prudent to check your NI record with the government to ensure you're on track for the full State Pension.

Q2: Are there any other benefits that are not pensionable?

Yes, many other salary sacrifice benefits, such as cycle-to-work schemes, childcare vouchers, and even certain types of health insurance, are also typically non-pensionable. The principle remains the same: the sacrificed amount is removed from your gross salary before pension calculations.

Q3: Can I choose to make my salary sacrifice pensionable?

This depends entirely on your employer's scheme rules and the specific pension scheme's regulations. In most standard car salary sacrifice arrangements, the sacrifice is designed to be non-pensionable to maximise the tax and NI savings. If you wish for the sacrificed amount to be pensionable, you would need to discuss this with your employer and HR department to see if such an arrangement is possible, though it is uncommon.

Q4: What if my employer's pension scheme is a Defined Benefit scheme?

In a Defined Benefit (DB) scheme, your pension is usually calculated based on your final salary or average salary over a period, along with your years of service. If you sacrifice salary for a car, your pensionable salary will be lower, meaning that both your salary history and potentially your final salary figure used for calculation will be reduced. This will directly impact the amount of pension you receive in retirement.

Q5: How do I find out if my specific scheme allows salary sacrifice and its pensionability?

The best source of information is your employer's HR department or the scheme administrator. They will have the official documentation and rules for both the car salary sacrifice scheme and your pension. They can clarify precisely how the sacrifice impacts your pensionable earnings and overall pension benefits.

Conclusion

Car salary sacrifice schemes offer attractive tax and NI benefits, but it's vital to be aware of their implications for your pension. By understanding that the sacrificed salary is generally non-pensionable, you can make informed decisions about whether this benefit aligns with your long-term financial and retirement goals. While the immediate savings are appealing, consider the potential impact on your retirement pot and explore strategies to mitigate any adverse effects. Informed choices lead to a more secure financial future.