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 Blogs in Business Tax
 
Richard Alecock
10th July 2017 Pros and cons of using limited companies for buy to let properties

Following the announcement to cut tax relief for landlords from April 2017, setting up a limited company to purchase investment properties has been suggested as one way to ease the burden of tax. Whilst the legal transaction is essentially the same whether an individual or a company is purchasing the buy- to- let properties, there…

Read More »

Jeannette Hume
5th June 2017 R&D Claims: Is HMRC advance assurance a good idea?

In a bid to give companies more certainty over whether or not their R&D claim will be successful, HMRC introduced an advance assurance process in November 2015. If you pass this new test, HMRC will agree not to enquire into your R&D claims for the first 3 accounting periods of claiming this relief. So is…

Read More »

Amanda Newman
1st June 2017 Making Tax Digital –Standard Chart of Accounts

For some clients making tax digital is now start to loom with them needing to commence quarterly returns in less than twelve months. With this in mind, they may be looking to set up new software programmes in preparation. But where do you start with the headings to use in your accounts? HMRC have stated…

Read More »

Paul Jefferson
30th May 2017 VAT – Bad debt relief – An important administrative VAT point

Several years ago changes were made to the H M Revenue & Customs policy regarding recovery of output VAT paid over but which hadn’t been received within 6 months of the due date.  Relief for the output VAT can now be obtained much more easily than under the historic process whereby notification was required to…

Read More »

Ian Piper
18th May 2017 General Election

General Election: Which manifesto helps TechCo’s ? With the 8 June general election fast approaching, directors of technology companies will be scanning the main manifestos to consider which party is potentially offering the most useful new policies for their business: Conservatives (link to 84 page manifesto) Running a balanced budget by the middle of the…

Read More »

Catherine Hubbard
26th April 2017 Has MTD been delayed further..?

All the clauses relating to Making Tax Digital (MTD) have been dropped from the Finance Bill, so many people have been asking if this means MTD will no longer go ahead?  We think that this is highly unlikely. The Finance Bill has been reduced from 762 pages to an expected 140 pages in order that…

Read More »