Much has been written on the subject of salary sacrifice for pension contributions for a good reason – in most situations, the concept is a 'no brainer'.

Many people have seen a fall in their disposable income over the last two to three years. As such the attraction of saving national insurance (NI) on pension contributions that they are paying personally will far outweigh the potential impact on certain earnings-related state benefits, most of which may never become payable.

A cynical view perhaps? Maybe, but governments in general seem intent on chipping away at benefits for those in work. We have had technical changes to the state earnings-related pension scheme and its MKII version, the 'state second pension' (S2P), restrictions on exempt childcare vouchers for higher-rate taxpayers and reduced access to incapacity benefits, etc. Perhaps a 'bird in the hand' might not be such a bad idea?

How can salary sacrifice help? Quite simply, because once salary has been reduced, the payment of income tax and NI on that element of income is no longer an issue.

If you haven't received it as income, then as the law stands today you won't pay tax or NI on it. Yes, the law could change in the future but is that a reason for higher-rate taxpayers not to put themselves in the best position in the meantime?

Salary sacrifice for pension contributions would allow higher rate taxpayers to save 2% NI contributions and where they have personal pensions (group or otherwise), to obtain full tax relief immediately.

Those paying the basic rate of income tax can usually save personal NI contributions of 12% of the amount sacrificed which most people would see as a welcome boost to their take-home pay. Of course there are potential risks for basic rate taxpayers to the extent that some state benefits (e.g. maternity pay, job seekers allowance and the S2P) depend on a minimum level of earnings either as a threshold for eligibility or simply because their value depends on the amount of a person's earnings between lower and upper limits.

S2P is one that people in work are more likely to focus on, in view of the reason for sacrificing salary in the first place. While it still exists, S2P treats those on earnings between £5,564 and £14,700 as if they were actually earning £14,700, which means that a lower earner sacrificing salary within this range is not likely to experience any reduction at all in S2P. In a few years, the plan is to combine S2P with the basic state pension into a single flat rate pension of around £140 per week in today's terms, so the risk here will eventually fall away.

It's not only employees who stand to gain from salary sacrifice for pension contributions, employers will also enjoy a saving on their NI contributions of 13.8% of the amount sacrificed. This kind of saving can often fund the entire exercise of introducing and communicating a pension scheme in the first year alone. Thereafter, an ongoing saving can be achieved. In many cases, employers will share their NI savings with staff by increasing contributions to the pension scheme.

HMRC recognises that salary sacrifice is a contractual arrangement between an employee and his or her employer. Provided this represents a bona fide change in employment terms, the resulting saving in NI contributions that this generates for the parties is not of concern to HMRC.

Arrangements to sacrifice salary for pension contributions need to be set up correctly in order to satisfy HMRC, although its approval of such an arrangement is not actually required. Indeed, it is not possible to obtain comment from HMRC until after a scheme has been put in place.

The successful introduction of a salary sacrifice for pension contributions scheme is down to effective communication. It's no good expecting written announcements to make this happen; an employer also needs to line up presentations for staff so that they can understand the benefits and any potential downside. The opportunity to ask questions (and even to have one-to-one meetings) means that people will be put in a position where they can make an informed decision about a subject that at first sight can look 'too good to be true'.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.