Salary Sacrifice and Registered Pension Schemes.
At PML Group we specialise in company pensions. As well as our SSAS proposition for business owners we also advise on staff pension schemes. One area of pension provision that we are seeing more of right now are so called Salary Sacrifice schemes, which is the subject of this article.
What is Salary Sacrifice?
A salary sacrifice scheme occurs where an employee agrees to take a smaller cash salary for a job than would normally be expected. Naturally, this sacrifice does not come without a benefit to the employee and it is usually made in return for some form of non-cash benefit from the employer.
In fact, salary sacrifice is usually financially advantageous for both employer and employee. This is because, for example, when part of an employee’s overall remuneration package shifts from cash (on which tax and National Insurance contributions are due) to non-cash benefits that are wholly or partially exempt, then the employee benefits through paying less tax and NI, and the employer benefits by paying less employers’ NI.
One important point: a salary sacrifice scheme cannot reduce an employee’s cash earnings below the National Minimum Wage level.
Some Examples of Salary Sacrifice
There are many ways of taking advantage of salary sacrifice. For example, if some salary is sacrificed in favour of Childcare Vouchers to the value of the salary sacrificed, then only the salary element is subject to tax and NI, whilst the childcare vouchers are exempt from both tax and class 1 NI up to a maximum of £55 per week. So if some of the salary was going to be spent on child care anyway, it is easy to see how this salary sacrifice benefits both parties.
There are many other areas of salary sacrifice, but the one we are most interested in is the area of Pensions. For example if part of a salary is a £5,000 cash bonus, then that bonus attracts tax and NI payments. If however that cash bonus is sacrificed in favour of a £5,000 contribution by the employer to a registered pension scheme, then there is no employment income tax or NI charge to the employee and the full amount is invested in the pension fund.
Schemes can be set up for regular employee contributions. For instance, a member is paid an annual salary of £25,000. As part of pay negotiations the employer can offer a pay rise of say 2% making the revised salary £25,500. The member can choose to not receive the increase and instead the employer will put an additional £41.66 per month into the member’s pension plan.
It is not unusual for the Employer’s National Insurance Contributions saved on this amount (13.8% – £5.75) to be added to the contributions. And of course, the employee does not pay additional Income Tax and National Insurance Contributions on the pay rise.
What to Beware of With Salary Sacrifice Schemes
The benefit given in return for the salary sacrifice has to be tax free for it to work of course. In addition to child care vouchers and additional employer pension contributions, some other salary sacrifice schemes include: cycle to work schemes, company cars, work-related training and car parking near the workplace.
However, salary sacrifice does bring with it areas that need careful consideration. For example:
– Lower earnings might affect maternity pay or mortgage applications.
– Lower earnings might affect your state pension allowance.
Please also note that although HMRC is currently happy with these arrangements they are, for obvious reasons, open to future attack.
We can help if you are interested in Salary Sacrifice
As pension specialists, if you are interested in Salary Sacrifice, then we can talk you through all the options, helping you take the right decisions for your own circumstances.
Contact us for more advice or call us on 0121 693 0690.
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