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How to set up a salary sacrifice pension in Xero Payroll

Mintago Team avatar
Written by Mintago Team
Updated over a week ago

Please be aware of the following if changing your default scheme to a salary sacrifice deduction:

  1. Xero can only run one pension scheme which should be the salary sacrifice scheme by default. Therefore, you will need to amend your current settings (Step 1) and create a new pension deduction for any employees who are remaining on your non-salary sacrifice pension scheme (Step 2).

  2. You will no longer be able to automatically submit pension data directly to your pension provider but will need to send this manually via CSV upload as Xero does not support a salary sacrifice pension in this way.

Please note that any contribution percentages used in these examples are only for demonstration purposes and you should continue to use your company's minimum contribution levels.

Salary Sacrifice Pension set up

The following steps show how to change your current pension settings to reflect a salary sacrifice pension deduction

Step 1 - Navigate to the following on Xero

  1. Payroll Settings

  2. Workplace Pension

  3. Under Pension Scheme, click: Edit

  4. If required, click: Disconnect to allow you to Edit the scheme if this is greyed out

  5. Keep in place the current employee and employer contribution percentages. (e.g. 5% employee and 3% employer)

  6. Under Show balance to employees select: Yes

  7. Leave Calculate on Qualifying Earnings settings the same.
    Note: If "Yes" the pension will be calculated on earnings between £6,240 and £50,270.

  8. Check the box to reflect a Salary sacrifice scheme.

  9. Reduce by basic tax rate: No

  10. Save

After applying these settings, your new CSV pension file will reflect a zero employee contributions and only show figures in the employer column.

The following steps are required if you have any employees who are not moving to the new salary sacrifice pension deduction. The following steps will show you how to set up a pension deduction manually.

Please select and follow instructions from one of the following

  • Net Pay Arrangement

  • Relief at Source

Net Pay Arrangement Pension Setup

Create new pension for employees who are remaining on the Net Pay Arrangement pension deduction.

Step 2 - Set up the Employee contribution

  1. Payroll Settings

  2. Pay items

  3. Click Deductions on the left hand side

  4. Add > Pre-Tax Pension (NPA)

  5. Name this appropriately (e.g. Eee NPA Pension)

  6. Select % of Gross

  7. Percentage: enter your minimum employee percentage (e.g. 5%)

  8. Select your relevant Liability Account

  9. Check the box for Calculate on Qualifying Earnings if applicable

  10. DO NOT check the box for Reduce by PAYE Basic Rate

  11. Click Add

Step 3 - Assign the NPA pension to individual employees

  1. Payroll

  2. Employees

  3. Click on employee’s Pay Template

  4. Under Deductions, delete the salary sacrifice pension deduction

  5. Under Deductions, click + Deduction and add the Eee NPA Pension with the % as required (e.g. 5%)

  6. Under Employer pensions, ensure the employer pension still reflects 3% (No change required) - see step 4 below if not showing.

Step 4 - Add an Employer Pension Deduction if none currently showing (see above in point No.6)

  1. select Payroll Settings

  2. Pay items

  3. Click Employer Pensions

  4. Add > Pension

  5. Name this appropriately (e.g. ER Pension)

  6. Select a Calculation Type > % of Gross,

  7. Percentage: enter your minimum employer percentage (e.g. 3%)

  8. Select your relevant Liability Account

  9. Select Show Balance to Employee

  10. Select Yes for Calculate on Qualifying Earnings only if this has been selected in Step 2.

  11. Click Add

Relief at Source Pension Set up

Create new pension for employees who are remaining on the Relief at Source pension deduction.

Step 2 - Set up the Employee contribution

  1. Payroll Settings

  2. Pay items

  3. Click Deductions on the left hand side

  4. Add > Post-Tax Pension (RAS)

  5. Name this appropriately (e.g. Eee RAS Pension)

  6. Select % of Gross

  7. Percentage: enter your minimum employee percentage (e.g. 5%)

  8. Select your relevant Liability Account

  9. Check the box for Calculate on Qualifying Earnings if applicable

  10. Check the box for Reduce by PAYE Basic Rate

  11. Click Add

Step 3 - Assign the RAS pension to individual employees

  1. Payroll

  2. Employees

  3. Click on employee’s Pay Template

  4. Under Deductions, delete the salary sacrifice pension deduction

  5. Under Deductions, click + Deduction and add the Eee RAS Pension with the % as required (e.g. 5%)

  6. Under Employer pensions, ensure the employer pension still reflects 3% (No change required) - see step 4 below if not showing.

Step 4 - Add an Employer Pension Deduction if none currently showing (see above in point No.6)

  1. select Payroll Settings

  2. Pay items

  3. Click Employer Pensions

  4. Add > Pension

  5. Name this appropriately (e.g. ER Pension)

  6. Select a Calculation Type > % of Gross,

  7. Percentage: enter your minimum employer percentage (e.g. 3%)

  8. Select your relevant Liability Account

  9. Select Show Balance to Employee

  10. Select Yes for Calculate on Qualifying Earnings only if this has been selected in Step 2.

  11. Click Add

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