Pensions salary sacrifice: Who said there is no such thing as a free lunch? 


Here’s a tale of how employees can save some money simply by changing the method of paying personal contributions to their workplace pension - as long as their employer is willing to play ball, that is.

But before I get too far ahead of myself let me tell you a story which will help to explain…

I recently met up with an old friend who had not long started a new job as an HR manager within a firm of 174 employees. For him it was a step up, both in terms of company size and also in position from assistant to manager.

Naturally he was keen to try and make an immediate impact for staff and his bosses and wanted to come up with an idea: either a new staff benefit or saving money on the benefits that they already offered. His company currently provide all staff with a 4x salary death in service scheme and a qualifying workplace pension scheme with a possible matched contribution of up to 5% of basic salary.

Misconceptions around salary sacrifice

Most employees realise this is a valuable benefit and, consequently, the majority have elected to pay in the full 5%. I asked him how the pension scheme ran currently and whether they offered salary sacrifice as a way for employees to pay their contributions. He said that they didn’t but thought that salary sacrifice was being blocked by the Government going forward.

I explained to him that this was only for the more spurious salary sacrifice arrangements, but for things like Cycle to Work schemes, childcare vouchers and pension contributions this was all OK as far as Mr Hammond and his colleagues were concerned.

“Great,” he said, “tell me more!”.

I went on to explain that if HR and payroll were prepared to undertake a little more administration in the running of the pension scheme, then potentially there was a lot of money that could either be saved by the company, used to provide other benefits or to enhance the contributions employees pay into their scheme.

Historically, employee pension contributions have been taken from employees’ pay after they have paid Income Tax and National Insurance (NI) on their salary and then deducted net of basic rate tax. By agreeing to pay employee contributions through salary sacrifice, the gross contributions are taken gross from gross pay.

A valuable benefit

What this means is that employees do not pay tax or NI on the contribution they have agreed to pay. “Doesn’t sound very exciting!” he said. “Maybe not”, I replied, “but as an employer, this simple change will save your company NI too because the contribution for each employee is not being paid as salary, and when you start putting the numbers together, then maybe it will change your mind”.

You see the average salary across his company is £31,000. That multiplied by 174 employees equals a payroll of nearly £5.4M. The employer’s NI rate on all of this is 13.8% and, remember, they are also paying a 5% pension contribution for most staff as well. £5.4M x 13.8% x 5% = a possible annual saving of £37,260.

The company could either use this to provide more benefits, split it or give it all to employees by way of an enhancement to the pension or, if they were feeling slightly more mean-spirited, keep it to offset some of the company costs.

For the employees, and particularly those who are earning below the NI upper earnings limit (UEL), which is £45,000 for 2017/18, they will also save 12% NI on their contribution as well. For the average employee earning £31,000 per annum, that works out to be £15.50 per month or £186 per year! All this in exchange for a little bit more admin.

Certainly food for thought and enough to buy a reasonable pub lunch once a month and maybe even a drink as well. Perhaps next time, assuming his company agree to the change, lunch might be on him!

Steve Scott is associate director at Punter Southall Aspire.

This article was provided by Punter Southall Aspire.


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