Why employers should consider a salary sacrifice pension: a three-point plan for implementation
Would you like to save nearly a quarter of your employer pension contribution costs from April 2019?
I think the answer for most companies would be yes, yet not all are using salary sacrifice for pension contributions – and that’s always a surprise to me, especially given the advent of automatic enrolment, and its success to date in bringing a whole new generation into pension saving.
Quite often some distant bad experience from the past can be reason enough not to implement, or maybe it falls into the “too difficult/complex” category for some.
Of course, there can be good reasons in some circumstances for not doing so, but if there is a reasonable population of employees earning more than £15,000 per annum, then it really is something which should be looked at – both from an employer and employee benefit perspective.
This is especially so with the recent increase in the statutory minimum pension contribution rate from two per cent to five per cent in April 2018, and then the further increase to eight per cent in April 2019. Allied to this, the employee minimum rate is increasing at a greater rate than the employer minimum, so the savings will be of greater relative impact. These increases are only going to strengthen the argument for an employer to operate salary sacrifice, which means the opportunity to mitigate the added employer pension contributions should not be ignored.
To recap, here’s how salary sacrifice works:
- Employees give up part of their salary and, in return, the employer gives them a non-cash benefit, such as childcare vouchers, or increased pension contributions.
- Once they accept salary sacrifice, the employee’s overall pay is lower, so they pay less tax and National Insurance. (However, as their salary is lower this could also affect credit applications such as mortgages etc.)
- In addition, the employer will not have to pay employers’ National Insurance contributions on the part of salary the employee sacrifices.
- Some employers pass on some or all of these savings to the employee, some choose to keep them within the business.
So, if you’re considering implementing salary sacrifice, here’s my three-point plan for how to go about it:
1. Communicate with your employees. Contracts will need to change several months in advance of the introduction of salary sacrifice so you need to explain to the employees what’s happening, why it’s worth it and how they can benefit. The table below gives more details on how one business could save:
For example, if we take an SME business of 250 employees and assume an average member salary of £30,000 per annum and then apply the statutory minimum pension contributions. We can see how the employers’ National Insurance savings generated become increasingly significant:
Up to March 2018
From April 2018
From April 2019
Auto enrolment minimum % contributions
NI savings pa
Net Cost pa
*Assumes standard personal allowance and all are basic rate tax payers. No employees earn less than £15,000 pa.
As the employee contribution rates ramp up, so does the employer National Insurance savings. However, what it also shows is that the members are benefiting from the employee National Insurance saving which, as a basic rate taxpayer, becomes a not insignificant 12 per cent. So, with the employer enjoying a 23 per cent saving and the employee 32 per cent (20 per cent tax relief and the employee National Insurance of 12 per cent combined), the argument for salary sacrifice can be compelling. And combining this with higher rate taxpayers receiving all of their tax relief at source rather than having to claim it back from HMRC, further strengthens the argument.
2. Engage with payroll to find out which employees are suitable for salary sacrifice and which aren’t. For example, those on or near to the national minimum wage, or receiving statutory maternity pay may not benefit, although others very likely will.
What has been clear since the increase in minimum pension contributions in April 2018 is that members haven’t opted out of pensions in their droves. Whether that is through apathy or a genuine desire and understanding that it’s a good idea to save for retirement, is open to argument. My hope is that it’s the latter and therefore, even with next year’s leap to a five per cent minimum employee contribution, a significant proportion of the workplace are likely to remain in the employer pension scheme. This means that employers are going to have to factor in the fact that increased pension costs are here to stay and any opportunity to mitigate these costs would surely be welcome.
The same would also surely apply to members and therefore if the employer can soften the impact of the increased employee contributions it will no doubt be appreciated. Indeed, if the move to a single rate of tax relief (as mooted by a group of influential MPs) is introduced for all, then basic rate taxpayers will see the burden of pension savings further mitigated.
3. Decide what to do with the savings generated.
Finally, I should also mention that the employer doesn’t necessarily have to keep its National Insurance savings. Controversial perhaps, but the option is always there to return some or all of the savings to the member and further support employees in saving for their retirement.
This option has gone out of fashion in recent years, and understandably so, with the added costs of auto enrolment. But just as fashion goes in cycles, maybe it’s time for a comeback in taking this approach!
The author is Darren Hedgley, associate director, Punter Southall Aspire.
This article was provided by Punter Southall Aspire.
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