Salary sacrifice pension / Salary exchange pension

What's the re-investment?

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Looking at salary sacrafice pension schemes for a small employer.

The saving that's to be re-invested is 100% ER and EE. 

I calculate that the ER NI saving is 13.8% on any sacrafice, and EE saving is 12% on any sacrafice (up to a cap where NI is then 2%).

Therefore an employee on £25k who sacrafices 5% (£1,250.00) saves 12% NI (£150.00) and this would be re-invested from their end 5% x 12% = 0.6%. Therefore EE contribution would be 5.6% on earnings with re-investment. (Ignoring the saving on the saving for the time-being).

Employer would save 13.8% on the £1,250.00 so therefore £172.50, therefore if 3% standard ER contriubtion + the saving (13.8% x 5% EE pens) = 0.69%. Therefore with re-investment ER would be 3.69% 

This completely ignores any income tax saving for the EE, which may vary for employees who still have personal tax allowances etc, so it's much simpler to re-invest the NI saving only for EE and ER.

Agree/disagree with the above?

Replies (9)

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By paul.benny
28th Jun 2023 10:00

Pension contributions attract tax relief so paying contributions by salary sacrifice normally has no impact.

Beware of salary sacrifice taking pay below NMW.

I would question whether a salary sacrifice scheme is worth the admin for a small employer. But you're the one that has to live with it.

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Replying to paul.benny:
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By C Graham
29th Jun 2023 10:51

Salary must be at least £21,400 to keep (just) above nmw after salary sacrifice.
It is a contractual reduction and employer only contribution. Very easy to administrate even for small companies and the NI saving and tax savings makes it worth doing. NB Only complications to watch out for are if someone is on SMP as the rules are not the same for sal sac pension during maternity leave as with other methods of making contributions. Employer must cover the full 8% and continue through smp statutory leave with no contribution from employee.

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By kestrepo
28th Jun 2023 11:03

Does your small employer contribute towards the 0.5% Apprentice Levy which is based on Gross Pay?

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By Truecon
28th Jun 2023 11:13

Hello yes, part of a larger group so due to connected companies levy is payable

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By kestrepo
29th Jun 2023 14:41

I would include that saving in the calcs making it 14.3% rather than 13.8% - every little helps!

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By frankfx
28th Jun 2023 11:24

employee may also enjoy modest saving on student loan.
yippee.

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By Hugo Fair
28th Jun 2023 11:47

FWIW .. deep breath (c) Willoughby ...

1. Salary Sacrifice is a contractual reduction in salary, NOT a deduction from it!
So anything else which depends on salary (from statutory pay to paid holiday and, if it should ever return, things like CJRS) will use the new reduced figure.
And the same applies to NMW.

2. If the ER makes additional pension contributions (as a kind of compensation for the reduced salary), then what used to be a mix of ER & EE contributions are now all from ER ... and those don't attract the 'tax rebate' into the pension pot.

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By accountaholic
28th Jun 2023 13:40

I echo all the above.

I also feel there's an admin burden in running salary sacrifice, and speaking to a pension adviser recently and she told me fewer employers are reinvesting the saving now as they feel it's compensation for the admin burden. Many have scaled back to less than 100% or even none.

In addition to Hugo's comments you should also be mindful that changes to NI rates in future could alter the figures (we nearly had a 1.25% increase recently). You need to make sure your contract terms are clear so you don't end up reinvesting more than the saving.

It's all your choice of course and part of the balance of maintaining attractive remuneration packages. I'd make sure you get good advice on the wording of employee contracts.

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John Toon
By John Toon
28th Jun 2023 16:11

I've dealt with plenty of businesses that do this. It's easy to set up and operate and aside from the issues already highlighted I'm not sure I agree that it's overly complex to administer.

As for what you do with the NI savings that's entirely up to the employee and employer and how you choose to structure the arrangements. I must admit I see fewer commercial organisations contributing the NI savings, although sometimes these are used to create a budget from which to offer other benefits. It's more prevalent in the NFP sector for the savings to be contributed.

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