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
 
Vanessa Pearson
26th March 2021 6 April: A Guide to Off-Payroll Working Tax Rules

The proposed new rules apply regarding who determines IR35 status for freelancers hired by medium and large companies are imminent. Our Brief Guide will help find out how this affects you and what you can do: A Brief Guide to Off-Payroll Working Blog entry by: Vanessa Pearson

Read More »

Steven Denton
18th March 2021 Changes to Coronavirus Job Retention Scheme (Furlough) from July 2021

As you will know by now, in the budget speech of 3rd March 2021, the government announced the extension of the current furlough scheme until September 2021. Further guidance has now been issued as to how the scheme will operate.   Firstly, for periods starting after 1st May, you can claim furlough for any employee,…

Read More »

Bethan Hassey
15th March 2021 COVID 19 filing extension for CS01’s coming to an end!

The current confirmation statement (CS01) filing deadline of six weeks from the ‘made up to date’ (the original 14 day deadline, plus an extension of 28 days) is coming to an end. CS01’s with a filing deadline of 6 April 2021 or later will no longer have the COVID 19 extension. Please see table summary…

Read More »

Ian Piper
8th March 2021 Budget 2021: Super Capital Allowances

In what was seen my many as a Budget lacking in ideas to kick start the economy back into life, Rishi Sunak’s announcement of a notional 30% uplift to eligible capital allowances headlined as the proverbial ‘rabbit out of the hat’. The tweaked allowances will give businesses purchasing brand new plant and machinery more tax…

Read More »

Fiona Mann
4th March 2021 Budget 2021

  Following Chancellor Rishi Sunak’s delivery of the Budget yesterday, we have a brief summary and details of how it may affect you. Please click the link below:   Whiting & Partners Budget 2021

Read More »

Stephen Malkin
28th February 2021 1-Mar-21: Are you ready for new VAT Domestic Reverse Charge rules for construction services?

VAT registered businesses working within the construction sector should be aware that new domestic reverse charge VAT administration rules are being introduced wef 1 March 2021 (delayed from original October 2019 launch date). The Government announced in the 2018 Budget that they are trying to reduce missing trader fraud; where builders collect VAT from their…

Read More »