Pensions, Insurance, and Investments

Pension Salary Sacrifice: What You Should Know?

Pension Salary Sacrifice: What You Should Know

Salary sacrifice scheme offers benefits for employers and employees alike, in the right circumstances. Employees can make substantial savings and earn benefits by opting for the salary sacrifice scheme. While the scheme offers benefits, it is important to understand that before opting for the scheme, the nature of benefits and its suitability for stakeholders needs to be ascertained by looking at various combinations. Sure is all that you need to know about the scheme and how you would be impacted by opting for it or opting out of it.

The trade-offs in a salary sacrifice scheme

The scheme refers to a trade-off where the employee foregoes part of his or her salary and receives other options in lieu of salary. The other options include company cars, specialist training, privileges of car parking, vouchers for child care and better employer pension contributions. Effectively it means that an employee will take home lesser salary then what he or she would have received and avails these benefits which may be more appealing in given circumstances.

Salary sacrifice for pension contributions

This refers to a scheme where employees forgo a part of their salaries and in return get that amount deposited into pension accounts with possible additional contributions from employer. The reasons why an employee would make additional contribution to the pension account is that, by paying out lesser salary, an employer will face reduced exposure to tax and NIC contributions. This benefit can then be used for making additional contributions to the pension account, where it will supplement the extra contribution made on behalf of the employee, from the portion of the salary.

Tax benefits for employee and employer

One of the benefits of the salary sacrifice scheme are the tax benefits that accrue to both the employee and employer. For the employee, the reduced income will peg him or her at overall tax rate slab, thereby reducing his or her exposure to tax. For the employer, lesser payouts through PAYE will reduce the exposure to the tax and NIC contributions. Employees can pass on part or whole of the benefits to the employee, which will boost the morale of the work force, at no additional cost.

Unsuitability of scheme in a few instances

Despite the advantages it offers for employees and employers alike, the scheme may not be suitable for all employees in certain situations. For instance, the reduced take home salary means that employees may find it difficult to repay mortgages, or meet the expenses as desired. This will also impact beneficiaries of Statutory Maternity Pay. Individuals who are entitled to SMP are likely to be impacted and need to ascertain this from their employers.

Implications of life cover availed through employers

Life cover offered by employers is generally a multiple of the salary drawn. When the salary is sacrificed through this scheme, it is highly likely that the life cover may also be reduced. However, it is important to note that not all employees resort to this option. Many employers actually offer salary sacrifice schemes without any reduction of life cover offered.

The need for balancing requirements with the scheme

It is important to understand certain requirements fully before opting for the scheme. Employers need to understand that at no point of time can this arrangement take employees cash earnings below the permissible national minimum wage rates. If an employee intends to take out a mortgage, then the scheme may not be the best option. Lenders typically look at the take home salary, for the purpose of calculating mortgage amount. Lower take home salary can end up with the lender offering a reduced mortgage amount.

Procedural aspects of salary sacrifice scheme

Employees need to setup the salary sacrifice arrangement by modifying the terms of the employment contract and get the employees to consent to the proposal. Employees may wish to opt in or out of the salary sacrifice scheme depending on changed circumstances and situations. Employees need to then alter contracts accordingly, specifying clearly the details of cash and non cash entitlements in the contract.

Scenario for achieving savings through salary sacrifice

Weekly Salary/BonusAmount of Salary/Bonus sacrificedBenefits availed in lieu of sacrificed salaryOverall benefits
£3,000 bonus£3,000£3,000 contributed to pension schemeEmployee is not liable to remit tax or NIC as entire amount goes towards pension contribution.
£500/weekly£100Voucher of £100Vouchers are exempted from tax and NIC contributions subject to a weekly limit of £55. Effectively £445 will be considered for tax and NIC contribution, while PAYE will be accounted for £400. End of tax year filing will show the weekly £55 non cash benefits through form P9D/P11D.
Companies need to take professional advice of qualified accountants to work out the modalities of the salary sacrifice scheme and submit the same to HMRC. After the scheme has been put in place, clarifications need to be sought from the HMRC about the applicable tax and NIC contributions. HMRC typically replies only after submission of the details of the scheme. It is therefore important to spell out the scheme details clearly and in a manner that is compliant with all regulations clearly and in a manner that is compliant with all regulations.

About the Author:

Sumit Agarwal
, A specialist accountant and tax adviser for freelancers, contractors and small businesses since 2005, He is an expert in business growth and development strategies. A renowned tax expert for owner managed businesses and contractors, He won the British Business Forum’s Young Entrepreneur Award in September 2012, presented at the House of Commons by MP Vrinder Sharma.