Salary Sacrifice – Benefits and Pitfalls

Please be aware that this article primarily pertains to Swedish rules and regulations, which may not necessarily apply or be valid in jurisdictions outside of Sweden.

Salary sacrifice is a popular topic right now. But what does it really mean? How does it work? Who benefits from it? Is there anything specific one should keep in mind? We'll address some of the questions surrounding this increasingly popular job benefit.

Salary sacrifice, as expected, refers to sacrificing a portion of your salary to something else. It can be done occasionally or regularly and may involve additional vacation days, a company car, cleaning services, private healthcare, or extra contributions to your occupational pension. Especially the last one, extra contributions to the occupational pension, is becoming increasingly popular. In practice, this means taking a portion of your gross salary and depositing it into your occupational pension savings instead.

Who Is Salary Sacrifice Relevant For?

Indeed, before considering salary sacrifice, you need to determine whether it's advantageous for you. So, how should you approach it? In general, your gross salary should be at least 49,967 SEK (2023) after deducting the salary sacrifice for it to be beneficial. Otherwise, salary sacrifice will have a negative impact on your public pension, sickness benefit, and parental benefit. It is always up to the employer whether or not to offer salary sacrifice.

To ensure both parties understand clearly, it's best to have a policy outlining the company's salary sacrifice rules and establish an agreement between the company and the employee. The contract should specify the duration of the salary sacrifice agreement, the termination process, and how the occupational pension is affected.

What Are the Advantages of Salary Sacrifice?

Approximately 8 out of 10. That’s how many employers choose to offer employees the opportunity to convert their salary. This a wise decision, as salary sacrifice is one of the most popular job benefits today, according to the employees. Offering this option can make the company a more attractive employer, successfully attracting and retaining talent, all without incurring additional costs.

So, from the employee's perspective, what are the reasons for wanting to convert their salary into, for example, larger pension savings? Here are some of the motivations behind the increasing utilization of this opportunity:

• You can save more money through salary sacrifice than the actual salary reduction. This is because the employer shouldn’t benefit from enticing employees to convert their salary. Since a lower salary payment from the employer reduces the cost of social security contributions, this needs to be balanced by higher contributions to the occupational pension.
• If you're close to the threshold for paying state income tax, you can convert the portion that exceeds the threshold and thereby fall below the tax payment level. As a retiree, you will receive the converted money back.
• You’ll get a strengthened pension through beneficial savings. The fees are low if you save within your collectively agreed pension savings. Additionally, the savings are tied to your retirement, and you cannot access the money until you start receiving your occupational pension, which can benefit those who struggle to refrain from using their savings.
• Salary sacrifice provides the opportunity to retire earlier due to the enhanced pension.

Things to Consider

As mentioned earlier, the first thing you need to do is to calculate whether you actually benefit from salary sacrifice. Other compensations and benefits may be affected, and as an employee, you need to look into this.

• If, after salary sacrifice, you earn below the income ceiling for respective benefits, sickness benefits, parental benefits, and temporary parental benefits will be lower.
• Under certain conditions, even the statutory retirement pension may be lower.
• ITP sickness pension will be lower.
• Pay attention to how the contributions to the regular occupational pension are affected. Suppose you have a defined contribution occupational pension where the contributions correspond to a percentage of your salary. In that case, you need to ensure that you are also compensated for the loss of your occupational pension.

Additionally, ensure that your employer bases salary revisions on your gross salary before the sacrifice. Even future occupational pensions, holiday pay, and salary supplements, such as standby and overtime pay, should be calculated based on the salary before the deduction. At unionen.se (in Swedish), there are some examples of calculations that you can use to see the potential effects of salary sacrifice.

Okay, I Want to Start Using Salary Sacrifice. How Do I Proceed?

First and foremost, you need to check with your employer if salary sacrifice is offered. Then, you need to reach an agreement with your manager and draft a contract that confirms your agreement. Both employers and employees will find peace of mind in knowing that salary adjustments are carried out accurately and in line with the agreed-upon terms.

In our web-based payroll system, Flex HRM Payroll, there is support for managing salary sacrifice. Moreover, you have the option to establish regulations for amount limits based on the pension agreement, which triggers an alert for the administrator if an unauthorized amount is entered. Contact us if you want to learn more!