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Auto Enrolment & the option of Salary Sacrifice

24th May 2016
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The payroll solution that provides all you need for Auto Enrolment.

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An employer and employee may agree to use ‘salary sacrifice’ (sometimes known as a ‘SMART’ scheme). If this happens, the employee gives up part of their salary and the employer pays this straight into the pension. Usually this results in less tax and National Insurance for both the employee and employer unlike the “Net Pay Arrangement” which usually only results in tax savings.

BrightPay Salary Sacrifice

Technically a salary sacrifice arrangement is an agreement between an employer and an employee to change the terms of the employment contract to reduce the employee’s entitlement to cash pay.  Auto enrolment is a legal requirement and although a salary sacrifice arrangement will result in savings for both the employer and employee, the employee cannot be forced to accept such an arrangement.

Some employees may not be comfortable showing their pay reducing by the sacrifice. They may need their P60 to show as much pay as possible if they are going for a mortgage, for example. Also, salary sacrifice cannot reduce an employee’s pay below the minimum wage. On the other hand, apart from the tax and NI benefits, there are other possible advantages to an employee using salary sacrifice. They may wish to show lower earnings in order to maintain their entitlement to certain state benefits.

In many cases the employer will take the amount that they save on employer’s NIC and pay this into the pension, thereby increasing the employee’s pension pot. Many employers are using the postponement period to allow their employees the time to decide if they wish to avail of salary sacrifice.

Where salary sacrifice is being used, there will only be an employer’s contribution. The employee’s deduction is zero. Some AE schemes may not be able to accept salary sacrifice and it will be important to check with your proposed pension provider.

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