A lot to think about...
For any company offering, or thinking of offering a pension scheme to its employees, the benefits of salary sacrifice cannot be ignored...
Salary sacrifice is all about changing the make-up of an employee’s remuneration in a more tax-efficient way, without increasing the overall cost to the employer of hiring that employee. It makes use of the fact that employer contributions paid on behalf of an employee to an approved pension scheme or other form of employee benefit (e.g. medical insurance) do not attract National Insurance contributions by the employer. Nor are such contributions treated as a benefit in kind on the employee. Any increase in National Insurance rates, whether to the employer and/or employee, will make salary sacrifice even more tax efficient.
Who can it benefit?
- Directors and executives within an EPP/SSAS
- Members of an occupational pension scheme
- Employers with, or wanting to set up, a GPP
- Individual with a PP/SIPP
- Individual with a stakeholder pension
Basically, any employee with ‘Schedule E’ income may benefit.
What can be sacrificed?
- Salary
- Contractual bonuses
- Discretionary bonuses
The catalyst for using salary sacrifice has been the huge shift to both Money Purchase and Group Personal Pension schemes over the last few years, together with recent increases to National Insurance contributions for both the employer and employees. Traditionally, employees make payments to group pension schemes with the promise of a tax incentive from the government. The tax incentive relates to a guaranteed 28.2% gain on every pound invested for a basic-rate taxpayer.
Salary sacrifice means giving up a portion of your gross salary, which then allows for not only a tax-incentive, but also National Insurance savings from both the employee and, importantly, employer as well (because the portion given up is from the gross, not the net, salary). If both these savings are reinvested in the pension scheme to benefit the employee, then the guaranteed gains are significantly better.
The table below looks at an individual employee (a basic rate taxpayer) who wishes to make personal contributions to his scheme of £100 net per month. It shows the staff member has increased investment by more than £40 per month without any change to take-home pay or additional cost to the company.
| |
Usual Payment
|
Using Salary Sacrifice
|
|
Net cost
|
£100
|
£100
|
|
Total Invested
|
£128.21
|
£168.35
|
|
% Gain
|
28.2
|
68.4
|
What is more, a higher rate taxpayer benefits even more – a guaranteed gain of 91.2% on every contribution. Start giving this sort of news to employees, and suddenly every one starts believing in your organisation’s pension scheme again. Take up should improve (with the knock-on effect to recruitment and retention), together with a general improvement in staff morale.
However, there are three simple “golden rules” which should be adhered to when considering this payment route in order to safeguard the process:
- Re-invest the employer’s NI saving
- Use Notional Salary for all staff benefits
- Salary sacrifice should not be used where it reduces take-home pay to below the National Minimum wage
It is also vital that documentation is correctly completed and retained on the employer’s file and that this is done annually.
In conclusion, every company with a Money Purchase, Group Personal Pension or Group Stakeholder scheme should consider this payment structure, although it is strongly suggested that detailed advice from an IFA fully familiar with the method is sought.
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