By Dave Gleeson, Financial Planning Consultant, Moore and Smalley Chartered Accountants and Business Advisors
While we all like to be rewarded with a salary, there are other ways in which you can reward your employees and one of the more obvious options is to provide a pension scheme.
Between October 2012 and September 2016 every UK employer, irrespective of size, will have to establish a pension scheme into which a minimum level of contributions has to be paid.
There will predominately be two types of scheme that most employers will choose between. The first is the new national savings investment trust (NEST) being set up as a centralised scheme with a 10 year administration contract with Tata Consultancy Services and a limited range of five different investment funds.
The second is to set up a group personal pension with an insurance company that has a proven track record of administering pension arrangements and is likely to offer a wider range of investment options for your employees to choose from.
There are a number of other differences between the NEST scheme and group personal pensions, which I do not have room to cover in this article, but one key difference is that a group personal pension will still allow the use of salary exchange, which will not be available via NEST.
The simplest definition for salary exchange is basically where an employee agrees to give up some of their ‘cash’ salary or bonus. The sacrifice is made in return for the employer’s agreement to provide the employee with some form of non-cash salary benefit.
As the salary is being ‘exchanged’ rather than paid, the employee does not pay any income tax or any National Insurance Contributions on the amount of salary or bonus exchanged. Similarly the employer also does not pay any National Insurance Contributions on the amount exchanged either — NIC tax saving for both.
Careful consideration has to be given when opting to exchange salary for a pension contribution, as this could impact on the employees’ other benefits, for example maternity/paternity pay.
With the launch of the NEST scheme over the coming years, many businesses are prepared to wait it out, but my advice would be to explore whether a group personal pension scheme could provide a better fit.
Watch the video featuring Standard Life explaining pensions.
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