Pensions auto-enrolment is one of the most important developments for employers currently coming into effect. Businesses with fewer than 50 employees must implement the process from 1 June 2015. As a consequence, employers will be looking to maximise tax reliefs, while employees will also seek to join the scheme in the most cost-efficient manner possible. A salary sacrifice arrangement will be an attractive option to consider in achieving both goals.
From October 2018 the minimum contributions payable by the employer and employee rise to 3% and 5% respectively. An employer may wish to run a salary sacrifice arrangement alongside their other auto-enrolment provisions.
What is salary sacrifice?
Salary sacrifice arrangements involve a contractual right to one’s cash pay being reduced. When drawing up such an arrangement the potential for future remuneration must be given up, and the new contract must state that the employee is entitled to lower cash and a benefit instead. Under auto enrolment, salary sacrifice arrangements can be used to meet the full 8% contribution. It is essential that membership of the pension scheme can be achieved without the employee having to consent to the salary sacrifice arrangement in advance, and it is crucial that payment options are allowed other than salary sacrifice.
What’s the advantage?
Both the employer and employee save money because there are reductions in the individual’s gross pay in exchange for the pension contribution by the employer which is tax and NIC free. Therefore there are savings on:
There is no tax saving as the tax saved is cancelled out by the tax relief from HMRC that would have been available on the employee’s contribution.
Considerations for employees
Employees must consider the impact a reduction in pay could have on their personal finances. In particular, entitlement to state benefits such as Statutory Maternity Pay is affected.
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