Providing employees with a salary sacrifice scheme can save them and the business money. 'Just getting by' is becoming more and more difficult. Employers are trying to reduce their costs and employees' take-home pay is being squeezed. At the same time, we are constantly reminded of the need to save more for our retirement. For employers and members of their pension scheme, a salary sacrifice scheme may provide a neat solution.
Where members are required to pay a contribution into their employer pension scheme, a salary sacrifice scheme can:
- reduce the employer's NI cost,
- increase the member's take-home pay, and
- increase contributions to the member's pension scheme.
How Does It Work? If a member currently pays a contribution of 5%, he/she takes a 5% salary reduction and stops paying the personal contribution. The 5% salary reduction is paid as an employer contribution to the pension scheme.
The member's take-home pay increases by the saving in employee NI on the lower salary (11% on earnings up to £43,888, 1% thereafter).The employer's costs are reduced by the NI saving (12.8%) on the salary reduction.
Pension contributions are increased by the employer adding some of his/her national insurance saving to the 5% employer pension contribution.
A further benefit is that higher rate taxpayers effectively obtain higher rate tax relief on pension contributions at source, rather than having to claim additional higher rate relief on personal contributions through their end of year tax return.
- The scheme must be well documented, and there are HMRC requirements to be observed.
- It needs to be flexible enough to cater for changes to individual employee circumstances.
- Employers will also need to consider how the scheme is communicated to staff.
An Illustration Consider an employee earning £25,000 who wishes to pay 5% per annum, or £1,250 per annum gross, into a pension plan. The company contribution is also 5% per annum or £1,250 per annum. The table illustrates the various savings and increases afforded by the scheme.
| Without Salary Sacrifice £ | With Salary Sacrifice £ | |
| Salary | 25,000 | 23,750 |
| Personal Allowance | 6,475 | 6,475 |
| Taxable income | 18,525 | 17,275 |
| Tax payable | 3,705 | 3,455 |
| NI | 2,121 | 1,983 |
| Net salary (gross earnings less tax and NI) | 19,174 | 18,311 |
| Deduct employee pension contribution (net) | 1,000 | 0 |
| Net disposable Income | 18,174 | 18,311 |
| Net Effect To The Employer | ||
| Salary | 25,000 | 23,750 |
| NI | 2,468 | 2,308 |
| Employer pension contribution | 1,250 | 2,580 |
| Total | 28,718 | 28,638 |
| Saving in employer costs | 0 | 80 |
| Net Effect To The Individual | ||
| Effective pension contribution | 2,500 | 2,580 |
| Increase in spendable income | 0 | 137 |
| Increase in pension contribution | 0 | 80 |
A Note Of Caution For Prospective Sacrificers
A salary sacrifice is a permanent reduction in your salary and you do not have the right to revert to your previous salary unless there are special circumstances.Your previous gross salary will be used as the yardstick for things such as annual salary increases or salary-related benefits.
Making a salary sacrifice could affect entitlement to state benefits, such as the state second pension and tax credits. It may also affect contribution based benefits, such as incapacity benefit and job seekers allowance, and mortgage arrangements as you are reducing your annual salary.
For comment on the latest cases (as at 9 February 2012) on salary sacrifice arrangements, go here .
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Great info. A lot of people will finance their loans as principle and interest. This means the amount of money you need to pay each month is greater than if you were to pay interest only.
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