By Bob Brassington, Employee Benefits Director at Smith & Williamson
Providing your employees with a salary sacrifice scheme can save them and your business money.
Employers are trying to reduce their costs and employees’ take home pay is being squeezed. At the same time, we are constantly reminded of the need to save more for retirement. For employers and members of their pension scheme, a salary sacrifice scheme can provide a neat solution.
Where pension scheme members are required to pay a contribution into their employer’s scheme, a salary sacrifice scheme can reduce the employer’s national insurance contributions (NICs) cost, increase the member’s take-home pay, and increase contributions to the member’s pension scheme.
How does it work?
If a member currently pays a contribution of 5% of salary, under a salary sacrifice scheme he or she takes a 5% salary reduction and stops paying the personal contribution. The 5% salary reduction is paid as an employer contribution to the pension scheme. The member’s take-home pay increases by the saving in employee NIC on the lower salary (12% on earnings up to £42,475, 2% thereafter).
The employer’s costs are reduced by the NIC saving (13.8%) on the salary reduction. Pension contributions are increased by the employer adding some of the national insurance saving to the 5% employer pension contribution. A further benefit is that higher rate taxpayers effectively obtain higher rate tax relief on pension contributions at source, rather than having to claim additional higher rate relief on personal contributions through their end of year tax return.
The scheme must be well documented, and there are HM Revenue & Customs requirements to be observed. It needs to be flexible enough to cater for changes to individual employee circumstances. Employers will also need to consider how the scheme is communicated to staff.
A note of caution for members
A salary sacrifice is a permanent reduction in salary and employees do not have the right to revert to their previous salary unless there are special circumstances. Previous gross salary will be used as the yardstick for things such as annual salary increases or salary-related benefits. Making a salary sacrifice could affect entitlement to state benefits, such as the state second pension and tax credits. It may also affect contribution-based benefits, such as incapacity benefit and job seekers allowance, and mortgage arrangements as you are reducing your annual salary.
At Smith & Williamson, we have been advising many of our corporate clients that operate contributory pension schemes about the merits of a salary sacrifice scheme and how it can be introduced.
To find out more about the benefit of salary sacrifice arrangements, contact Bob Brassington on 0117 376 2150 or email email@example.com
By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.
Smith & Williamson Employee Benefit Consultants
A division of Smith & Williamson Financial Services Limited which is authorised and regulated by the Financial Services Authority
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