Pension salary sacrifice – a win, win for employers and employees?
Salary sacrifice, or salary exchange as it is often now referred to is not a new concept. Although it has become increasingly common amongst employers, with many organisations offering pension salary sacrifice, I’m still surprised when I hear of employers not using this arrangement. An effective salary sacrifice arrangement is a fantastic opportunity for you to save money, whilst also helping your employees boost their pension savings.
Why you might want to consider salary sacrifice
As the name suggests, pensions salary sacrifice involves your employees sacrificing, or exchanging a proportion of their salary and in return you provide an additional employee benefit, in this case a contribution into their pension.
By giving up a proportion of their pay before they would otherwise receive it, your employees benefit from a reduction in their income tax and national insurance (NI) contributions. Allowing them to increase their pension contributions at no additional cost to them.
As a result, you will pay less employer national insurance contributions, saving 13.8% on the sacrificed amount. In monetary terms, this will vary of course based on your employee head count and the number of employees who participate in your salary sacrifice scheme. But this saving can present a number of opportunities.
Employer salary sacrifice savings
What you do with the savings from your salary sacrifice arrangement is ultimately down to you, but there are a number of considerations and opportunities when it comes to these savings, including:
- retain all of the savings and reduce the overall cost of managing your workplace pension scheme;
- retain all of the savings and use the money on another employee benefit initiative, which might be offering pension advice sessions to employees, funding group pension presentations, or perhaps the implementation of a wellbeing and communications portal;
- retain some of the savings and pass the remainder on to your employees by way of an increased pension contribution; or
- pass all of the savings on to your employees by way of an increased pension contribution.
Of course, you can’t simply say ‘today’s the day we implement salary sacrifice’, there are steps and considerations that need to be taken in to account:
- There will be a set-up cost with implementing salary sacrifice, but often employers can recover the cost of implementation within a few months of the arrangement being in place.
- Salary sacrifice is a contractual change to an employee’s terms and conditions and will therefore involve HR or Payroll’s time to implement and communicate the changes.
- Salary exchange does not tend to work for those lower income workers earning close to the National Living Wage (NLW) or the income tax threshold of £12,500, therefore as an employer you need to be mindful of this and wouldn’t include these employees in your salary sacrifice arrangements.
- Communication is key. As you’ll know from other initiatives you have run, the way in which you communicate with your people can be the difference between success and failure. Implementing salary sacrifice is no exception. Think about the language you use, salary exchange can often be considered more employee friendly than the term salary sacrifice. Focus on the benefits salary sacrifice can bring, but don’t forget to highlight where it could negatively impact employees too – be transparent and allow employees to make informed decisions.
- How do you want employees to agree to the scheme; negative affirmation is successfully used by many employers, resulting in high take-up rates. But there are some legal and HMRC areas to consider.
- Ongoing, you will need a series of processes in place to ensure that national minimum wage and national living wage regulations are adhered to and that employees do not sacrifice below the primary threshold as this would affect entitlement to other benefits.
None of the above should feel like a barrier to implementing a salary sacrifice arrangement, and working with an experienced employee benefits consultant can make this a win, win for you and your employees.
Simon Belcher, Employee Benefits Partner at Secondsight
Find out more
Secondsight has worked with a number of employers on salary sacrifice arrangements from guidance and advice, to identifying what your potential savings could be, through to implementation and communication. Contact us to find out more.
Secondsight is a trading name of Foster Denovo Limited, which is authorised and regulated by the Financial Conduct Authority.
Information correct as of 09/02/2021