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Pension Salary sacrifice - is it worth it?

6th Jul 2014
Managing Director Pension Playpen
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Salary sacrifice

Every employer can offer salary sacrifice as a way to lessen the impact of personal pension contributions on cash flows. 

Since personal contributions are paid from salary, they will already have attracted corporate and personal national insurance. With an employee's consent, these contributions can be paid directly by the employer in lieu of salary, avoiding national insurance on the amount sacrificed.

For most employees, the impact is cost neutral and if the employer chooses to share some or all of the national insurance saving, salary sacrifice can boost the employer's pension contribution.

But salary sacrifice is not an effective way of saving for some people. If an employer offers a salary sacrifice arrangement, employees need to be properly appraised of the deal on offer. They do not have to take part in it, even if the employer's auto-enrolment workplace scheme uses it. 

How it works

The employee gives up part of your salary. The amount you give up is paid by the employer into the employee's pension pot, and the employee receives a lower salary.For example, you earn £30,000 a year and decide you want to give up £1,000 of your salary. Your new salary is £29,000. Your employer pays £1,000 to your pension pot, and also pays its own contribution.

Because you receive a lower salary, both you and your employer pay less national insurance contributions (NICs). Your employer may pay all or part of their NIC saving to your pension pot as well, but they don't have to do this.

How do Employees know if it is right for them?

An employer should tell staff in general terms how salary sacrifice might affect them and whether or not they would pay some or all of the NICs they save to the pension pot. Staff can also ask their employer to carry out a calculation to show how salary sacrifice would affect their take home pay. 

Possible disadvantages to you as an employee

The result of sacrificing part of your salary is that you have a lower salary. Whether or not this puts you at a disadvantage depends on how your employer operates salary sacrifice, and the level of your salary. There are four areas where you may be disadvantaged.  

Life cover

Your employer may provide you with life cover, which is usually worked out as a multiple of your salary. Your employer can choose whether to use your pre-sacrifice salary or your salary after salary sacrifice.

Refund of contributions

Some workplace pension schemes offer you a refund of your own contributions if you leave before you have been in the scheme for two years. Under salary sacrifice, you are not directly paying contributions so there are no contributions to be refunded.

Getting a mortgage

Mortgage lenders usually calculate how much you can borrow as a multiple of your salary. Your employer can choose whether to use your pre-sacrifice salary or your salary after salary sacrifice, when they give you a mortgage reference.

State benefits

Your entitlement to some state benefits, such as Statutory Maternity Pay (SMP) and the state second pension (S2P) may be affected if your salary falls below the level at which you pay NICs. Your employer should be able to tell you whether or not you will be affected in this way. You can also find helpful information atwww.gov.uk

Can an employer cancel salary sacrifice?

Salary sacrifice is a voluntary scheme. The employer can stop offering it at any time.

If it forms part of a staff member's contract of employment, so the employer may have to change staff contracts before it can stop offering salary sacrifice. 

So is it worth it? 

For most employers yes. It does require some explaining and may require a little work on employee contracts and adjustment to payrolls. But set against the savings, we think most employers will consider it. There are still 1.2m employers to stage auto-enrolment and many of them have never provided a pension for their staff. This is a big opportunity for the accountancy and payroll professions to step up to the plate and provide value.

For more information

Salary sacrifice is regulated by HM Revenue and Customs. You can find more information and guides on their website:www.hmrc.gov.uk/specialist/salary_sacrifice.htm

The guides go into more detail about the effects of salary sacrifice on state benefits such as maternity pay, the minimum wage and tax credits.

What accountants can do

Advising an employer on setting up a salary sacrifice scheme is not an FCA regulated activity so this is something every accountant or book-keeper can become an expert and advise upon. Employers can implement salary sacrifice themselves (and some do), but most smaller employers will struggle.

When the savings in national insurance are laid out , employers are usually enthusiastic. The savings are of immediate benefit to the employer and (assuming employers use some of the savings to enhance pensions) of deferred benefit to staff. Put in pound shillings and pence, these savings and pension enhancements surprise and delight.

But employers and employees always look for the catch. It is important to point out the problems outlined above. Failure to properly explain the "catch" will result in reduced take-up and has been known to lead to future legal problems where staff claim against employers for non-disclosure.

We strongly advise any employer or accountant to study the HMRC rules before implementing a pensions salary sacrifice program and to make absolutely sure that staff, payroll, pension provider and HMRC are properly informed of the scheme's existence and of any sharing of NI savings.

For personal help..

If you've read this, feel that either your employer or your client(s) should be using salary sacrifice and you have questions, you can drop me a line at [email protected]. I'm always happy to help with individual enquiries and will put you in touch with other experts if you need more personal help.

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Replies (4)

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By Kate Upcraft
06th Jul 2014 11:11

next year it's absolutely worth it
As a payroll consultant working with accountants' payroll bureaus to help them deliver AE to clients salary sacrifice is a very important tool in the AE cost debate but not one that is understood, and not just by the clients? This year I've seen supposed sacrifices on SME payrolls that are not set up compliantly which means that the supposed PAYE and NICS savings should not have been taken as the sacrifice is not effective. Done properly and where, as Henry points out, the employees understand any downsides, the savings for employers of 13.8% NICs are very significant as is the corporation tax on the enhanced employer contribution. It's why the AE contributions are quoted by DWP as a total figure and an employee minimum is not quoted, only an employer minimum to allow for sacrifice to be widely adopted. My view is that the government expect there to be a massive take up in pension salary sacrifice and that is one of the drivers for them to remove the employer from offering childcare via salary sacrifice for those wanting to join the new tax-free childcare scheme next autumn.

There is another imperative now though that will surely drive employees too to ask for a pension salary sacrifice. if you are anywhere near 55 why wouldn't you, from next April , sacrifice money into your pension pot and then withdraw it as it suits you and control your marginal rate of tax (which you cant do with your salary). This ought to get accountants asking their payroll bureaus to make sure the offer is there for personal tax clients as well as corporate clients.

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By Henry Tapper
07th Jul 2014 06:15

Jeremy Levene ‏@JeremyLevene 
 20h   More

customers who have staged and offer are twice more likely to pay above the statutory minimum

 

Obviously people will look at this tweet two ways; some may see no commercial advantage to companies in encouraging higher payments than the statutory minima, others will see higher levels of saving as a "good thing".

 

As a pension person, I obviously want to see higher levels of contribution, not because I benefit (I can't as I'm not taking back handers from asset managers) but because I know there will be general disappointment at the outcomes if employers and staff stick to the statutory minima.

 

The danger of any legislated minima is that these are taken to be "adequate", for most people, the minimum auto-enrolment contributions will not be enough to make for happy and solvent retirements.

 

If ,as Ceridian's experience suggests, salary sacrifice encourages employers and staff to be more ambitious in their pension contributions, then salary sacrifice is having an unforeseen and beneficial side-effect.

 

Thanks Jeremy, not sure how you tweet comments but I'd be particularly interested in the views of others on this as it seems a really important point.

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By Kate Upcraft
07th Jul 2014 06:25

pensioner payroll skills

Interesting to hear that this is happening, i've been telling people when lecturing that it's one of the postive impacts of the budget changes for payroll professionals that their skills in managing payroll - salary sacrifice for employees and pensioner payrolls for those who've cashed in will be in demand

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By Henry Tapper
07th Jul 2014 07:16

Pensioner Payroll Skills

We had this discussion at the Payroll World Conference earlier in the year. 

For many smaller firms- we see payroll subsuming the pension function and we're directing a lot of our attention at educating payroll not just about auto-enrolment but on the strategic importance of pensions- even to small companies.

 

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