Pension Salary sacrifice - is it worth it?
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.
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.
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
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.
You might also be interested in
I'm best known for helping small employers and business advisors with their problems with pensions. These are typically over choosing the right pension for auto-enrolment though through my work with First Actuarial, I get involved with big occupational schemes too.
I'm on this site as I see accountants as the missing...