September 27, 2023

Small Business

Business Nes

What is a salary sacrifice pension? A guide for employers

10 min read

The government is eager to stimulate folks to conserve into personal pension pots.

For the reason that of this, some generous tax breaks are offered. Just one of these, recognized as salary sacrifice, can even profit the employer.

In this write-up, we get a look at income sacrifice pensions and how they do the job, and response a series of queries you could have about them.

Here’s what we protect:

What is a wage sacrifice pension?

Income sacrifice is a way of notionally reducing a salary to pay back for added benefits presented by an employer.

These gains are attractive to an worker, this sort of as shelling out for an electric vehicle, or employing the Cycle to Work scheme to seek the services of a bike.

Occasionally these are referred to as added benefits-in-form, or BIK. Some BIKs are taxed, but some others aren’t.

Income sacrifice can also be utilized for staff pension payments, and is not taxed.

To fully grasp the benefits, we initial have to go over the existing way workers commonly shell out into their pensions.

Tax relief is presently readily available on own pension contributions. To make it simple, lots of companies offer you a net shell out arrangement.

This usually means the pension contribution is taken from the wage in advance of tax is calculated, and so significantly less tax is deducted from the pay back. As a result, the personnel receives tax relief on the pension contributions devoid of getting to do nearly anything.

Salary sacrifice pension contributions are an option to the internet shell out arrangement that typically is effective out much better for both of those worker and employer.

It is also identified as salary trade, and, significantly less commonly, Clever (Help save Extra and Lessen Tax).

With salary sacrifice pension contributions, a new contractual salary is agreed by decreasing the authentic wage by the amount the employee wishes to make as a pension contribution.

In exchange, the employer pays the similar price as employer pension contributions on leading of any current employer pension contributions (e.g. a minimal of 3% as for every auto-enrolment procedures).

Due to the fact their salary is now efficiently decreased, staff not only probably cut down the tax they pay—just like with the web spend arrangement—but also lessen their Class 1 Countrywide Coverage contribution (NIC) payments (and, as of 2023/24, payments for the Health and Social Care Levy).

The employee can use the decreased NICs to fund an amplified pension payment, or decrease the value of contributing over-all.

Possibly way, it’s typically a lot more valuable than utilizing the web shell out arrangement, or the different reduction at source arrangement.

Since companies also fork out a separate Course 1 NIC (and Health and Social Care Levy contributions as of 2023/24), this is also decreased.

This saving is instant, with no prerequisite to claim it again at a long term date.

On payslips, it can appear as if the employer has created 1 larger sized contribution, with the worker seemingly obtaining contributed almost nothing.

Of training course, this is not in fact the case.

How does a wage sacrifice pension operate?

There’s at minimum 4 phases included in implementing wage sacrifice pension contributions.

1. How possible is a salary sacrifice pension?

Making income sacrifice pension contributions is not acceptable for every person.

It simply cannot lower the employee’s spend below the Countrywide Minimum Wage (NMW), inspite of what the worker could ask for.

Other normal or irregular deductions also need to have to be taken into account at this point to ensure that they additionally the salary sacrifice never at any time choose the wage underneath this authorized requirement.

Paying considerably less than the NMW can get an employer in sizeable lawful issues.

Therefore, this is some thing companies will want to frequently watch if an worker makes use of salary sacrifice (despite the fact that this can be folded into ongoing payroll obligations checking automobile-enrolment pension standards, this kind of as whether or not young or lessen-earning staff grow to be qualified).

2. Selections for salary sacrifice pensions

Secondly, the worker need to be in settlement that salary sacrifice should be utilised and that it does not have an impact on any statutory payments (see ‘Disadvantages for employees’, below).

Income sacrifice pension contributions can’t be unilaterally imposed by employers, though they may possibly default to these types of a procedure and request the worker if they agree. This can be performed during present conversations all around pension car-enrolment.

If the staff disagrees (or only opts out of the pension plan) then it must be probable to do the job without having salary sacrifice deductions.

If the personnel agrees to income sacrifice, they’ll also need to have to come to a decision what share of their income to give up as salary sacrifice (e.g 5%, 10%).

This may require them calculating how significantly their gross pay back will be decreased, and consequently how significantly they’ll save through reduce earnings tax and NICs.

The employer will have to make your mind up if they’re heading to move any cost savings they acquire with regard to lower employer NICs (and Wellbeing and Social Treatment Levy as of April 2023) to the employee’s pension contributions.

Some companies glimpse to move on price savings they may possibly make right after plan prices, but it isn’t obligatory.

3. Changing the work agreement for a salary sacrifice pension

Thirdly, any current employment deal requires to be modified to point out that the personnel is in receipt of the reward that is salary sacrifice pension advantage.

Usually, this is done by introducing a clause to the employment contract, which is communicated to personnel when they sign up for income sacrifice, but businesses ought to seek legal assistance on the wording.

It’s well worth noting that HMRC does not normally allow personnel to swap in and out of salary sacrifice far more than as soon as in a 12-month period of time unless of course there’s a major life party, this kind of as relationship, divorce, delivery of a kid, and so on.

If you are unsure, check with HMRC’s regulations and suggestions.

4. Applying income sacrifice weekly/month-to-month in payroll software

At last, the payroll application will have to be configured so that the wage sacrifice is utilized.

Not all payroll computer software is compatible with income sacrifice, so businesses should really examine with the software program seller.

Sage Payroll can be employed for wage sacrifice pension contributions.

If wage sacrifice pension contributions haven’t been undertaken prior to, this will most likely require building a new payment/deduction for wage sacrifice.

This will then be used in the pensions set up spot, with both the employer and staff contributions specified.

Then, for the duration of payroll, a new wage sacrifice line will seem for the staff, with the calculations mechanically used to the web income quantities.

Benefits of a wage sacrifice pension

All people enjoys saving on tax and National Insurance policies contributions in a way that is not only legal but encouraged.

HMRC did not touch the wage sacrifice pension arrangement when it clamped down in 2017 on tax relief for other varieties of income sacrifice (e.g. rewards-in-variety schemes these types of as very low-emission vehicles).

That’s as beneficial a thumbs-up as you are going to get.

Below are the particular added benefits for employees and businesses.

Benefits for staff members

Employees get to enhance their pensions via intelligent efficiencies in a way that’s far more effective in comparison to alternate options.

Or they get to take home a lot more spend.

For these paying out into a pension later in daily life, when their earnings could be increased, salary sacrifice pension contributions give a superior way to make up for missing floor or weak pension effectiveness by building greater payments without the need of decreasing get-dwelling pay.

It’s also probable for staff members to insert a salary sacrifice bonus or more wage payments.

Once more, these having to pay into a pension later on in lifetime usually set substantially or all of any yearly bonus straight into their pension to stay away from shelling out tax on it, or to prevent pushing their wage into a higher tax bracket.

To continue to be on the correct aspect of the regulation with regard to when a bonus is viewed as to be received, a selection need to be made for the sacrifice of the reward properly in advance of time.

In apply, it is typically finished right before the entitlement to the reward is exposed.

Rewards for companies

Businesses possibly get to help save sizeable quantities on salary payments if they preserve the NIC savings for themselves.

In addition, pension contributions are an allowable tax deduction.

So with successfully enhanced employer contributions, businesses could preserve right here too (whilst assistance should really be sought from a tax qualified).

But companies need to have to glance at the even larger photograph.

Personnel are increasingly aware of salary sacrifice, so businesses that really don’t give it are at a likely competitive drawback when it arrives to recruitment.

If the employer agrees to go on their Course 1 NIC price savings to the employee’s pension contributions then this can kind yet another really desirable recruitment aspect.

Once all over again, the staff gets to strengthen their contributions with no loss of earnings.

This will come at no added outlay for the employer when compared to a non-income-sacrifice arrangement.

Cons of a income sacrifice pension

As tempting as they are, it is mistaken to consider that salary sacrifice pension contributions are without the need of difficulties.

And that is one thing that should really be thought of in advance of time.

Here’s what you require to be aware of.

Disadvantages for personnel

Personnel need to consider treatment that income sacrifice doesn’t deliver their salary down below the decrease earnings limit (£6,396 per calendar year in 2022/23).

If that transpires, it indicates they shed upcoming entitlement to the likes of statutory ill pay back, maternity pay out, paternity fork out, incapacity gain, and additional.

Moreover, simply because the contractual earnings are now minimized, the amount of borrowing the personnel may be able to obtain could be diminished.

This can influence mortgages in specific. The likes of existence assurance can also be influenced when they’re set at a many of the contractual income.

Down sides for companies

Businesses experience a probably higher administrative load all around setting up salary sacrifice schemes and then maintaining them.

On the other hand, it is possible to argue that this must be regarded as as component and parcel of any current do the job executed for car-enrolment pensions.

Notably, HMRC doesn’t generally take an interest in salary sacrifice pension preparations by businesses, but it’s sensible to maintain any documentation just in case.

Numerous companies considering wage sacrifice focus on it through the HMRC helpline very first, or get other experienced assistance to assure compliance.

The admin duties for businesses require at minimum the following:

  • Educating workforce about the possibility of salary sacrifice. This contains the cons mentioned over (while this can outcome in a acquire-earn for equally companies and personnel if the latter concur to a wage sacrifice pension). Nevertheless, your pension provider might have sources you can deploy.
  • Delivering a way to choose in or out, such as on the web, or by completing a paper type. On the internet kinds normally have a income and pensions calculator to enable staff members make the finest final decision. When opting out, it must be produced distinct that this is opting in or out of salary sacrifice pension contributions and NOT car-enrolment (although opting out of car-enrolment routinely signifies giving up wage sacrifice, of class).
  • Applying a right work contract clause for personnel that decide in. Making sure that it is issued to employees, that they signal it by way of settlement and authorisation, and that this arrangement is retained securely along with other payroll file keeping.
  • Checking employee wages that utilise salary sacrifice. This is to make certain the wage doesn’t drop underneath National Living Wage or National Minimum amount Wage amounts (although payroll computer software may possibly assistance with this and make this task easier).

Case in point of how a salary sacrifice pension performs

Jane Smith earns £25,000 a yr.

Her employer operates a basic car-enrolment pension scheme where by it contributes the minimum amount 3% employer contribution, although all its personnel lead 5% utilizing the internet pay procedure.

Employing HMRC’s Class 1 NIC payroll checker calculator, we can see that before salary sacrifice, the regular Course 1 NICs are as follows:

  • Employer NICs: £199.46
  • Worker NICs: £166.99

Following income sacrifice of 5% of her earnings, and with Jane now contractually earning £23,750 a 12 months, the month-to-month NICs are reduced as follows:

  • Employer NICs: £183.78 (saving £15.68 per month)
  • Employee NICs: £153.19 (preserving £13.80 for every thirty day period)

Salary sacrifice pension FAQs

Here are the responses to often asked queries about income sacrifice in apply:

How much need to your staff sacrifice for their pensions?

The vehicle-enrolment minimal of 5% staff contribution will have to continue on to be noticed.

Most employees sacrifice concerning 5% to 15%, based on their situations and necessities with regard to pension personal savings.

What is the restrict to a wage sacrifice pension?

There’s no constraints on the most that can be sacrificed.

Although to preserve tax aid, contributions just cannot exceed £40,000 each and every year for most folks.

Can staff choose out of a income sacrifice pension?

Wage should be a voluntary arrangement in between employer and personnel.

The moment underway, personnel can choose-out, although HMRC may perhaps penalise the employer if this happens more than as soon as in a 12-month period of time except the staff has a excellent motive.

These consist of childbirth, redundancy of the individual’s spouse, and other existence-altering gatherings.

Ultimate ideas on salary sacrifice pensions

Wage sacrifice pension contributions provide a ton for everyone involved, with quite few drawbacks.

No matter if it is ideal for you and your personnel is a determination that you’ll need to make, potentially by discussing it with HMRC to start with, or obtaining other qualified advice.

These conversations must also assist assure compliance with laws.

Having said that, presented the limitations discussed above are noticed, and assuming companies can spare the administrative capability to deploy it, both workers and employers stand to get devoid of there getting any pain.