Pension salary sacrifice schemes are not a new concept, but one that all employers should consider, especially at a time where the tax burden on both employers and employees is high. These schemes, which see employees sacrifice some of their monthly salary in return for increased employer pension contributions, are not only good for helping employees to plan ahead for their retirement, but also offer tax benefits.
Salary sacrifice arrangements help employers make their salary budget stretch a bit further. For every £100 the employee agrees to sacrifice, the employer will see a £13.80 reduction in its national insurance (NIC) bill. In turn, many employers can share their NIC savings, either in full or in part with employees in the form of additional pension contributions. However, it is also not uncommon for employers to use part of the NIC savings to help them create a pot to help provide new benefits or incentive awards to their employees.
For many employees, the ability to receive immediate tax relief is a key advantage of the scheme, alongside reducing the need to adjust their pay-as-you-earn (PAYE) code number, which is ideal for higher and additional-rate taxpayers. However, basic-rate taxpayers will also see a reduction in the amount of NICs they pay by £10, reducing to £8 from this month, for every £100 they agree to sacrifice. Furthermore, employees should consider the amount of salary they wish to sacrifice, because reducing their taxable earnings could bring them into a lower tax band.
Proper planning is essential. A key aspect of the scheme will require a variation to the employees’ contractual terms. This will require their agreement to a reduction in their salary, and in return the employer will agree to pay the corresponding amount in pension contributions on their behalf.
Communication is key to the implementation of a successful pension salary sacrifice scheme. Typically, consideration needs to be given to staff briefings and written communications which clearly set out the advantages and disadvantages when presenting the scheme as an option. However, they are not well-suited to everyone; its use must not reduce an employee’s earnings below national minimum and living wage rates.
With thoughtful planning, pension salary sacrifice schemes can help to generate savings for both the employer and employee, encourage pension saving and optimise staffing budgets, and are, therefore, a valuable employee benefit for many businesses to offer.
Nick Bustin is an employment tax director at Haysmacintyre