What is a salary sacrifice pension? A guide for employers

The federal government is eager to encourage folks to help you save into personal pension pots.

Because of this, some generous tax breaks are available. One of these, known as income sacrifice, can even gain the employer.

In this write-up, we just take a look at salary sacrifice pensions and how they perform, and respond to a collection of concerns you could have about them.

Here’s what we address:

What is a wage sacrifice pension?

Wage sacrifice is a way of notionally decreasing a wage to spend for rewards made available by an employer.

These rewards are interesting to an personnel, these kinds of as having to pay for an electrical car or truck, or using the Cycle to Work scheme to seek the services of a bike.

Often these are referred to as rewards-in-sort, or BIK. Some BIKs are taxed, but many others aren’t.

Salary sacrifice can also be applied for personnel pension payments, and is not taxed.

To realize the added benefits, we very first have to discuss the current way workforce commonly pay into their pensions.

Tax aid is previously out there on private pension contributions. To make it simple, many businesses offer you a net fork out arrangement.

This indicates the pension contribution is taken from the salary just before tax is calculated, and so significantly less tax is deducted from the pay back. As a consequence, the worker receives tax reduction on the pension contributions devoid of possessing to do just about anything.

Income sacrifice pension contributions are an substitute to the net pay out arrangement that normally functions out improved for both personnel and employer.

It is also identified as income exchange, and, considerably less commonly, Smart (Conserve Far more and Decrease Tax).

With salary sacrifice pension contributions, a new contractual wage is agreed by reducing the initial salary by the sum the employee wishes to make as a pension contribution.

In trade, the employer pays the exact value as employer pension contributions on top rated of any present employer pension contributions (e.g. a minimum amount of 3% as for every auto-enrolment policies).

For the reason that their salary is now efficiently decreased, staff not only potentially lessen the tax they pay—just like with the web fork out arrangement—but also cut down their Class 1 Nationwide Insurance contribution (NIC) payments (and, as of 2023/24, payments for the Health and fitness and Social Treatment Levy).

The personnel can use the reduced NICs to fund an elevated pension payment, or decrease the price tag of contributing general.

Either way, it is typically additional useful than using the net pay out arrangement, or the alternative reduction at supply arrangement.

Mainly because employers also pay a separate Class 1 NIC (and Health and Social Treatment Levy contributions as of 2023/24), this is also lowered.

This saving is instantaneous, with no need to assert it again at a long term date.

On payslips, it can appear as if the employer has produced just one more substantial contribution, with the personnel seemingly possessing contributed nothing at all.

Of system, this is not really the circumstance.

How does a salary sacrifice pension operate?

There’s at least four levels associated in applying salary sacrifice pension contributions.

1. How possible is a salary sacrifice pension?

Building wage sacrifice pension contributions is not acceptable for everyone.

It simply cannot lower the employee’s spend down below the Countrywide Least Wage (NMW), even with what the staff may possibly ask for.

Other normal or irregular deductions also need to be taken into account at this position to be certain that they in addition the salary sacrifice don’t ever just take the wage beneath this authorized prerequisite.

Spending significantly less than the NMW can get an employer in significant authorized problems.

As a result, this is something businesses will need to regularly watch if an personnel utilizes wage sacrifice (despite the fact that this can be folded into ongoing payroll responsibilities checking auto-enrolment pension criteria, these as no matter if youthful or reduced-earning workers turn into suitable).

2. Choices for wage sacrifice pensions

Secondly, the personnel ought to be in arrangement that wage sacrifice should really be employed and that it does not influence any statutory payments (see ‘Disadvantages for employees’, below).

Wage sacrifice pension contributions cannot be unilaterally imposed by employers, whilst they may default to these kinds of a procedure and question the personnel if they concur. This can be done throughout present conversations around pension car-enrolment.

If the employee disagrees (or merely opts out of the pension scheme) then it need to be attainable to perform without salary sacrifice deductions.

If the employee agrees to income sacrifice, they’ll also want to make a decision what share of their salary to give up as wage sacrifice (e.g 5%, 10%).

This may perhaps involve them calculating how a lot their gross pay out will be lessened, and thus how much they’ll help save by means of reduce profits tax and NICs.

The employer will have to decide if they are going to pass any financial savings they obtain with regard to decreased employer NICs (and Health and Social Care Levy as of April 2023) to the employee’s pension contributions.

Some companies look to pass on financial savings they may possibly make following plan expenditures, but it isn’t obligatory.

3. Adjusting the work agreement for a wage sacrifice pension

Thirdly, any present work agreement needs to be modified to mention that the staff is in receipt of the reward that is salary sacrifice pension gain.

Commonly, this is finished by incorporating a clause to the employment agreement, which is communicated to workforce when they indicator up for salary sacrifice, but companies should really seek out lawful advice on the wording.

It’s worth noting that HMRC doesn’t ordinarily allow for staff members to swap in and out of income sacrifice extra than at the time in a 12-thirty day period time period except if there’s a significant everyday living function, such as relationship, divorce, start of a little one, and so on.

If you are unsure, examine with HMRC’s procedures and rules.

4. Implementing wage sacrifice weekly/month to month in payroll software program

Ultimately, the payroll application must be configured so that the wage sacrifice is utilized.

Not all payroll program is appropriate with salary sacrifice, so employers ought to look at with the software seller.

Sage Payroll can be used for wage sacrifice pension contributions.

If wage sacrifice pension contributions haven’t been undertaken prior to, this will in all probability involve making a new payment/deduction for income sacrifice.

This will then be utilized in the pensions setup location, with both the employer and personnel contributions specified.

Then, all through payroll, a new income sacrifice line will seem for the worker, with the calculations instantly applied to the net salary amounts.

Benefits of a salary sacrifice pension

All people enjoys conserving on tax and Countrywide Insurance plan contributions in a way that’s not only legal but inspired.

HMRC did not touch the salary sacrifice pension arrangement when it clamped down in 2017 on tax aid for other sorts of wage sacrifice (e.g. rewards-in-variety techniques this sort of as reduced-emission motor vehicles).

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

Here are the particular positive aspects for staff and businesses.

Gains for workforce

Workers get to improve their pensions by way of intelligent efficiencies in a way that’s far more productive compared to alternate options.

Or they get to get home a lot more pay.

For those having to pay into a pension later on in lifetime, when their earnings may be higher, wage sacrifice pension contributions offer you a fantastic way to make up for dropped ground or lousy pension effectiveness by producing greater payments without lowering get-household pay.

It is also probable for workers to add a wage sacrifice reward or supplemental wage payments.

Once more, these paying into a pension later on in lifestyle generally set a great deal or all of any yearly bonus straight into their pension to stay away from spending tax on it, or to stay clear of pushing their income into a larger tax bracket.

To stay on the correct side of the law with regard to when a reward is viewed as to be received, a selection will have to be designed for the sacrifice of the bonus well in advance of time.

In exercise, it is commonly completed before the entitlement to the bonus is discovered.

Positive aspects for businesses

Businesses possibly get to preserve substantial amounts on salary payments if they hold the NIC savings for by themselves.

Additionally, pension contributions are an allowable tax deduction.

So with properly increased employer contributions, companies could conserve here much too (although assistance need to be sought from a tax expert).

But employers need to seem at the greater photograph.

Employees are more and more informed of wage sacrifice, so employers that really don’t provide it are at a possible competitive disadvantage when it will come to recruitment.

If the employer agrees to pass on their Course 1 NIC cost savings to the employee’s pension contributions then this can form a different very attractive recruitment variable.

The moment again, the employee receives to raise their contributions with no loss of earnings.

This comes at no more outlay for the employer as opposed to a non-wage-sacrifice arrangement.

Disadvantages of a wage sacrifice pension

As tempting as they are, it is completely wrong to believe that income sacrifice pension contributions are without the need of challenges.

And which is some thing that should really be regarded ahead of time.

Here’s what you have to have to be knowledgeable of.

Disadvantages for staff

Employees have to have to take care that salary sacrifice doesn’t provide their wage beneath the lessen earnings restrict (£6,396 for each 12 months in 2022/23).

If that takes place, it implies they lose long term entitlement to the likes of statutory unwell fork out, maternity fork out, paternity fork out, incapacity gain, and more.

On top of that, simply because the contractual earnings are now minimized, the amount of borrowing the worker might be able to accessibility could be reduced.

This can impression mortgages in particular. The likes of lifetime assurance can also be impacted when they’re set at a a number of of the contractual salary.

Shortcomings for employers

Companies deal with a potentially increased administrative stress all around environment up income sacrifice strategies and then maintaining them.

Having said that, it’s possible to argue that this really should be deemed as portion and parcel of any current work executed for vehicle-enrolment pensions.

Notably, HMRC does not usually get an desire in wage sacrifice pension preparations by businesses, but it’s clever to hold any documentation just in scenario.

Numerous businesses considering wage sacrifice talk about it via the HMRC helpline initially, or get other qualified steerage to assure compliance.

The admin tasks for companies involve at least the pursuing:

  • Educating workers about the probability of income sacrifice. This includes the disadvantages mentioned above (whilst this can final result in a gain-win for equally businesses and staff if the latter agree to a wage sacrifice pension). On the other hand, your pension company may well have assets you can deploy.
  • Delivering a way to opt in or out, these kinds of as on the web, or by completing a paper variety. On the internet varieties generally have a salary and pensions calculator to enable staff make the greatest choice. When opting out, it really should be designed very clear that this is opting in or out of salary sacrifice pension contributions and NOT vehicle-enrolment (whilst opting out of car-enrolment automatically indicates offering up wage sacrifice, of program).
  • Making use of a correct work deal clause for employees that choose in. Ensuring that it is issued to employees, that they indicator it by way of settlement and authorisation, and that this settlement is retained securely together with other payroll record holding.
  • Checking staff wages that utilise salary sacrifice. This is to assure the wage does not fall under National Residing Wage or National Bare minimum Wage amounts (even though payroll computer software might aid with this and make this endeavor much easier).

Example of how a salary sacrifice pension functions

Jane Smith earns £25,000 a yr.

Her employer operates a basic automobile-enrolment pension plan wherever it contributes the minimal 3% employer contribution, while all its workforce contribute 5% using the internet pay out process.

Making use of HMRC’s Course 1 NIC payroll checker calculator, we can see that in advance of income sacrifice, the regular monthly Class 1 NICs are as follows:

  • Employer NICs: £199.46
  • Personnel NICs: £166.99

Pursuing salary sacrifice of 5% of her earnings, and with Jane now contractually earning £23,750 a year, the regular monthly NICs are diminished as follows:

  • Employer NICs: £183.78 (conserving £15.68 for every thirty day period)
  • Employee NICs: £153.19 (conserving £13.80 for each month)

Salary sacrifice pension FAQs

In this article are the solutions to routinely questioned questions about salary sacrifice in observe:

How a great deal really should your staff sacrifice for their pensions?

The automobile-enrolment minimum amount of 5% employee contribution must keep on to be noticed.

Most workforce sacrifice amongst 5% to 15%, depending on their situations and necessities with regard to pension cost savings.

What’s the limit to a salary sacrifice pension?

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

Though to retain tax relief, contributions simply cannot exceed £40,000 each individual year for most people today.

Can personnel decide out of a income sacrifice pension?

Wage need to be a voluntary arrangement concerning employer and personnel.

Once underway, employees can decide-out, even though HMRC might penalise the employer if this comes about much more than as soon as in a 12-thirty day period period unless of course the worker has a fantastic explanation.

These involve childbirth, redundancy of the individual’s partner, and other daily life-switching activities.

Final thoughts on income sacrifice pensions

Wage sacrifice pension contributions give a whole lot for most people concerned, with extremely few disadvantages.

Whether or not it is appropriate for you and your staff members is a decision that you will require to make, probably by discussing it with HMRC initial, or finding other experienced steering.

These discussions should also assistance be certain compliance with legislation.

Nevertheless, presented the restrictions reviewed previously mentioned are noticed, and assuming businesses can spare the administrative ability to deploy it, both of those workers and employers stand to achieve without having there being any suffering.