Salary Sacrifice to Boost Pension Funding

3rd March 2014

As employer funding of occupational pension schemes becomes more expensive and complex, many employers are abandoning this traditional remuneration channel, leaving employees to organise and fund their own retirement income planning.

This change in policy will typically be structured by an increased salary, to enable the employee to individually contribute directly into a personal pension plan.

An opportunity exists, however, for employees to renegotiate their remuneration package, to sacrifice an element of salary in exchange for the employer contributing directly into the employee’s personal pension plan. Depending on the level of an employee’s salary, such a scheme can be structured to leave the cost to the employer, and the employee’s net disposable pay, unchanged, whilst increasing the pension scheme funding by up to 34%:

  Pre Salary Sacrifice Post Salary Sacrifice
Gross annual salary £20,000 £18,235
Employer’s national insurance £1,763  £1,519
Employer’s pension contribution £2,009
total costs of employment
£21,763 £21,763
Employee’s pension contribution  £1,200  –
Employer’s pension contribution  – £2,009
Government income tax rebate £300
total pension funding    £1,500 £2,009
net disposable pay
 £14,762 £14,762

“Schemes of this nature have obvious attractions to employees, and very little extra administrative work for employers”, commented Ely office payroll bureau partner Barbara Nicholas. “These are genuine win-win situations, where a relatively simple restructuring exercise can effectively lead to both employer’s and employee’s national insurance relief being obtained on the pension funding, as well as the traditional income tax relief.”


Before introducing such a scheme, employers should consider the following:

  • Ensuring that the pension provider’s record correctly reflects whether contributions are received net or gross of basic rate income tax,
  • Taking care to ensure this extra funding and lower salary does not lead to contributions exceeding the maximum percentage allowed by HM Revenue & Customs, relative to an employee’s net relevant earnings,
  • Considering how this affects employment contracts,
  • Deciding whether such a scheme should be offered selectively or to all employees,
  • Evidencing the salary sacrifice in writing, as an amendment to the Employment Contract, before the remuneration in question has been earned.

The benefits of such salary sacrifice restructuring are usually sufficient to warrant the introduction of such a scheme with most employers. With careful structuring, this is a simple means for employers to assist employees financially, without actually increasing their total cost of employment



 
Other items in Business Tax
 
Jodie Pheby
22nd July 2021 Accounts Basis Period Reform – Consultation

Under current rules, businesses draw up annual accounts to the same date each year. The profit/loss for the tax year is usually the profit/loss for the year to the accounting date – called the basis period.  Tax is paid on profits earned in the basis period ending in the tax year in question.   However,…

Read More »

Bethan Hassey
1st July 2021 Changes to the reduced rate of VAT for hospitality, holiday accommodation and attractions

  In July 2020 the government announced that VAT registered business who operate in the hospitality and tourism industry could use a temporary 5% reduced rate of VAT on certain supplies compared to the standard 20%. The objective of this legislation was to support businesses in this sector during the Coronavirus pandemic and assist with…

Read More »

Thomas Nicholls
15th June 2021 Tax on Cryptocurrency does not have to be cryptic

Within the last 10 years the cryptocurrency scene has exploded from the first decentralised cryptocurrency, Bitcoin, being created back in 2009 to now more than 4,000 different cryptocurrencies being in existence with a total market cap value of over £1trillion.   This has led to the creation of the Cryptoassets Taskforce which was announced back…

Read More »

Scott Butcher
9th June 2021 Paying VAT by Direct Debit – check your HMRC records

HMRC are in the process of moving VAT records for non-MTD registered traders from their old database to a new one.   Due to banking requirements if HMRC does not hold a valid e-mail address for a trader, when the data is transferred to the new database, any existing direct debit mandate will be cancelled.…

Read More »

Steven Denton
3rd June 2021 National Insurance holiday for employers hiring veterans

Following an announcement by the government in 2020, from April 2021 employers hiring former members of the UK armed forces will be exempted from any NI contributions liability on the veteran’s salary up to the Upper Secondary Threshold (UST) in the first twelve months of their employment. However, under current guidelines relief for the 2021-22…

Read More »

Vanessa Pearson
20th May 2021 VAT deferral payment scheme deadline 21 June 2021

One of the ways government helped businesses in 2020 was to allow them to defer paying VAT liabilities due between March and June that year. Those taking advantage of this had until 31 March 2021 to pay. In September 2020, the Chancellor announced the VAT deferral payment scheme. Instead of paying in full by 31…

Read More »