How to show pension contributions under salary sacrifice

This article explains how to record salary and pension contributions in FreeAgent when an employer is making contributions and the employee is using salary sacrifice.

Please note that FreeAgent's payroll functionality won't be available if you have an unincorporated landlord account or if you're preparing your accounts using cash basis accounting.

There are two ways that you can enter salary sacrifice in FreeAgent to align with HMRC’s guidance. You can either reduce the employee’s wage by the salary sacrifice or enter the salary sacrifice as a deduction from net pay. If you’re unsure which method to use, please speak to your accountant.

Once the money has been paid out of your business bank account, you’ll then need to explain the payment to the pension company.

You’ll need full (level 8) access to your FreeAgent account to follow the steps below.

Method 1: reduce the employee's wage by the salary sacrifice

One option is to deduct the amount of the salary sacrifice from the employee’s wage. This means that the amount of the salary sacrifice won’t be reflected anywhere on the employee’s payroll profile or payslip.

When using this method, don’t enter an amount in either of the ‘Net Pay Contributions’ or ‘Relief at Source Contributions’ fields on the employee’s payroll profile or payslip. Instead, only enter the employer's contribution in the ‘Employer Contribution’ field.

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Method 2: enter the salary sacrifice as a deduction from net pay

Alternatively, you can enter the employee’s gross pay on their payroll profile or payslip as normal and enter the amount of the salary sacrifice as a deduction in the ‘Other Deductions From Net Pay’ field.

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When using this method, don’t enter an amount in either of the ‘Net Pay Contributions’ or ‘Relief at Source Contributions’ fields on the employee’s payroll profile or payslip. Only enter the employer's contribution in the ‘Employer Contribution’ field.

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Explain the payment to the pension company

Regardless of which method you use, once the relevant bank transaction has been imported in FreeAgent via a bank feed or uploaded from a bank statement, you’ll need to explain it using the appropriate ‘Type’ and ‘Category’ as detailed below.

Navigate to the ‘Banking’ tab at the top of the screen, select ‘Bank Accounts’ from the drop-down menu and choose the relevant bank account from the list.

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Select the transaction that relates to the payment to the pension company and select ‘Payment’ from the ‘Type’ drop-down menu.

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Select either ‘Pension (Personal/Stakeholder)’ or ‘Pension (Annuity)’ from the ‘Category’ drop-down menu. If you're unsure which category to select, please ask your accountant.

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Select ‘Explain Transaction’ to complete the process.

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