One of the themes we’re looking at in these articles is how to save, or sometimes even make, money in respect of your pension exposure
If your pension scheme allows it (and most will), you might want to look at salary sacrifice.
This applies to most pension schemes; trust-based, contractual, final salary-type and money purchase. Whether or not your company sponsors a scheme, has a contract with an insurer who does most of the heavy lifting, or even if you make employer contributions to some of your staff’s personal pension schemes, auto-enrolment can make your payroll a little bit cheaper.
A lot of the employers we work with now have salary sacrifice schemes in place, and we’ve set up a good number recently. If you’ve thought about salary sacrifice, but not yet implemented it, or never really looked at it, now might be the time.
After all, it will save you, and your employees, National Insurance on pension contributions, and given that those rates have recently gone up for employers, salary sacrifice makes even more sense now. It’s a way of giving your staff a little more money in their pay packets without costing you much. There is usually more administration involved for you, especially when setting an arrangement up, but over the longer term, it’s usually very cost-effective.
What is salary sacrifice?
It is very nearly ‘something for nothing’, and it benefits both the employer and the employees who are associated with a pension scheme.
Putting it simply, the employee agrees to give up certain part of their pay (the ‘sacrifice’). In exchange, the employer makes a larger equivalent employer contribution to the pension fund to reflect both its own contributions and the amount the employee has sacrificed.
As pay is ‘permanently’ (or at least not just temporarily) reduced, if properly done this means that both you and your staff will pay lower National Insurance on that lower pay. The employee will usually get a slightly higher take-home pay level as a result, and the same amount of money goes into the pension fund.Some employers keep their own NI saving, some share it with staff by way of a larger pension contribution, and some pay all of their saving into the employee’s pension fund; the choice is completely open.
You can choose to offer an ‘opt-in’ approach, where staff must actively decide that they want to sacrifice, or an ‘opt-out’ where salary sacrifice is the norm unless staff elect not to use it (or it is not possible to provide it for them). In an ‘opt-out’ arrangement, you do need to be careful that you don’t include someone who legally can’t sacrifice salary because it will drop their remaining pay below required minimum levels. There may also be some staff for whom salary sacrifice is legal but not financially beneficial.
All this needs to be done formally, including the change to employees’ contracts to reflect the sacrifice and the increase in employer contributions as a result. Because it’s a change to a contract, it cannot be changed again at will, although there is more flexibility than a ‘permanent’ change to the contract might suggest.
It used to be possible to use salary sacrifice for lots of benefits, but HMRC has progressively restricted this. You can still also use it for things like zero emission vehicle leasing, cycle to work schemes and childcare provision as well as pensions.
It does have to be done properly, or the sacrifice will be invalid, and you and your staff could end up owing backdated National Insurance contributions. There is a need for clear communication and consultation, often some internal training, adjusting payroll, ongoing monitoring and reporting to HMRC.
Finally, you must notify HMRC, who must approve it; they won’t do so in advance or give specific guidance. However, for pensions the routes to a successful implementation are pretty clear.
What’s the catch?
There isn’t really a ‘catch’ at the moment. Although salary sacrifice has been progressively restricted in its scope, pension contributions are still one of the commonest uses. And because the path is so well-travelled, it’s usually fairly simple to put a successful offer together.
You have to make sure that the reduced salary doesn’t drop below National Living or Minimum Wage levels. Even though lower-paid staff, if they wanted to stay in a pension, might be better off overall if they could participate in salary sacrifice, pay cannot drop below those statutory minimum levels.
For some staff who receive benefits, sacrificing can be an advantage or a disadvantage depending on what lower pay will do to those benefits. You do need to tread carefully when offering or deciding not to offer staff access, especially if you do so selectively, as there could be discrimination issues.
There are also monitoring issues for staff on parental or sick leave, which can be complex. Sometimes, depending on the exact arrangements and your scheme, you may need to pay employer pension contributions when you would not in a conventional arrangement.
Perhaps the biggest potential catch is that the whole system is often the subject of speculation as to whether a government will end it. After all, it reduces NI contributions and therefore the Treasury loses out. However, so far, successive governments, even when looking to raise tax overall, have left it alone. That doesn’t mean it’s safe in the future but, for now, it can save you money and provide an almost free benefit to most staff.
I’m interested. What next?
If you’d like to explore salary sacrifice, please get in touch with our pension team.
Quick update on the Virgin Media case
Last time we talked about the possible risks to trust-based pension schemes of the Virgin Media case. This called into question the validity of some deeds if they had not been certified by the scheme actuary in circumstances where most people had thought it wasn’t needed.
The decision and the principles around which rule changes needed certification still stands. However, the Government has recognised the problems this has created. It has promised to bring forward legislation that will make it possible to get that certification retrospectively, even many years later. Assuming you can get your actuary to give you that certification, the problem, and the costs and concerns associated with reviewing your scheme’s history and putting it right, may well go away.
More on this, and the big changes coming to UK pensions via the new Pensions Schemes Bill, soon.
We have a range of options and standard documents you can use. We can do anything from offering you a pack of template forms and documents to running the whole exercise on your behalf. We can also offer training to your HR teams and managers.
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