Are you and your employees making the most of salary sacrifice?
As many readers will be aware, in April 2017 the range of benefits that can be offered via salary sacrifice arrangements was reduced considerably. However, fortunately, it remains for pension contributions – which, in my opinion, is the most important and valuable use of salary sacrifice. Typically, workplace pension contributions will be an employer’s second highest reward cost (after salary), so the National Insurance contribution (NIC) savings available through pensions salary sacrifice can be significant.
Quick recap: what is salary sacrifice?
For those who aren’t familiar, salary sacrifice is a contractual arrangement whereby an employee agrees to give up a certain amount of their salary in exchange for another benefit. In this case, an employer pension contribution. Providing your salary sacrifice scheme is set up correctly, the main benefit to both employer and employee is a reduction in NICs. Employers will save 13.8% on the amount of salary sacrificed, and employees will save either 12% or 2% (or somewhere in between, if their sacrifice spans the upper earnings limit). This is in addition to the usual tax relief available on pensions, and so helps to make long-term saving more affordable.
Who is salary sacrifice for?
As salary sacrifice can benefit so many people, it’s easier to summarise who it isn’t for. If you don’t pay income tax or NICs, then there will be no benefit from entering into a salary sacrifice arrangement. Non-taxpayers are typically best off using the ‘relief at source’ (ie net contribution from net pay) method of pension contributions, as these automatically benefit from the addition of 20% basic rate tax relief, regardless of how much tax the individual has paid. Likewise, you can’t enter into a salary sacrifice arrangement if it takes your pay below the National Living Wage (or National Minimum Wage, if you’re under 25). So, salary sacrifice isn’t appropriate for employees in these categories. But most other people would typically benefit.
The 13.8% employer NIC saving can add up to a significant amount. And it’s up to you what you choose to do with it. Many employers rebate some or all of their saving back to their employees as an additional pension contribution. This can be a great added incentive to encourage people to save more, or to stay enrolled in your scheme. Others use the saving to offset some of the cost of introducing auto-enrolment, or the minimum contribution increases, or to improve other aspects of their benefits programme.
Making the most of it
We all know that engaging people with their pensions, particularly younger generations, can be tricky. Clear, relevant and timely communications are vital for getting the most out of all aspects of your workplace reward and wellbeing programmes. The same applies to salary sacrifice.
By saving NICs as well as income tax, the net cost to your employees can be reduced significantly – so make sure you shout about it. Using graphical communications, with ‘pounds and pence’ examples can help really bring the message home. Saving 3% of salary, or £100 a month, or whatever it may be, suddenly feels much more achievable. Especially when you factor in the employer contribution on top. If you’re rebating your employer NIC saving to employees, make sure you shout about that as well.
Auto-enrolment has been an enormous success in overcoming people’s natural inertia towards saving in a pension. The same approach can be used to help you and your employees obtain maximum benefit from salary sacrifice. More and more employers are moving towards salary sacrifice as the default option for their workplace pension scheme (other than for the categories of workers mentioned above, of course). This would typically require changes to your employment contracts – so there is some advice and a bit of work needed at the outset to set it up. And it’s crucial to do this correctly to make sure your scheme is acceptable to HMRC. But once you’re up and running, there shouldn’t be any additional input required over and above your existing pensions management processes.
If you don’t use salary sacrifice as your default pension contribution method, and want to maximise take-up, then effective employee communications are absolutely imperative. Where you are using it as the default, your communications instead need to focus on encouraging people to remain in the scheme and consider how much they need to be saving etc – much like your other pension communications in a post auto-enrolment world.
Sacrifice what??! Perception is everything...
Salary sacrifice is the ‘official’ name, and preferred terminology of HMRC. But let’s face it, it’s not the most enticing of phrases. If a communication (be it an email, social post, website alert, poster or anything else) starts with the words ‘salary sacrifice’, it is understandable why some people may choose not to read any further. Consider using the much friendlier ‘salary exchange’ instead. Or, even better, the snappy ‘SMART’ acronym: Save More And Reduce Tax. Two clear benefits in just five words; much more appealing than the idea of sacrificing your hard-earned salary.
SMART employers and SMART employees
In summary, and with the usual caveats around everyone’s circumstances being different and the need to take appropriate advice where relevant, pensions salary sacrifice is a fantastic tool for making workplace pensions more affordable for both employer and employee.
If you’re not yet using SMART contributions in your workplace, it’s definitely worth considering. Speak to your adviser about whether it’s right for your workforce and, if so, whether it should be the default option for your scheme.
When you are using SMART contributions, make sure you clearly communicate the benefits to your employees and tie this in with your other financial wellbeing initiatives. Most people are keen to know about anything that can help their money go further, and SMART contributions do exactly that.
By Patrick Tooley, financial wellbeing partner, Lorica.
This article is provided by Lorica.
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