Stuart Price: Why salary sacrifice is still as important as ever

Even as the new Prime Minister follows through with her pledge to reverse the NI increase, salary sacrifice is still a valuable tool in structuring cost-effective benefit packages says Stuart Price partner and actuary, Quantum Advisory

Despite the Prime Minister’s April’s National Insurance (NI) contribution increase of 1.25 per cent, the anticipated rush of businesses implementing a salary sacrifice arrangement as a more efficient way for employees to pay pension contributions and help offset the rise, has yet to materialise. Yet the good news is that the government appears to have no intention of abolishing salary sacrifice for employee pension contributions.

As businesses and individuals feel the pinch with the increase to NI contributions and the impact of high inflation and increased interest rates, salary sacrifice arrangements for employee pension contributions are an effective option requiring minimal effort to initiate. Adopting a salary sacrifice arrangement could make a real and noticeable difference for workers, in terms of take-home pay.

So, what is salary sacrifice? Employee pension contributions get tax relief however both employees and employers pay NI on the pension contribution. Salary sacrifice for employee pension contributions is an agreement between an employee and their employer where the employer pays the employee’s pension contribution to the pension scheme in addition to their own and the employee’s wage is adjusted to reflect this. As the employer is paying the employee’s pension contribution, no NI is paid on this by either the employee or employer and hence both make a NI saving. The result is the employee benefits in a net increase to their take home pay.

Substantial savings for both employers and employees can be made. Employers save 15.05 per cent per annum on the total pension contribution paid by employees, while employees save either 13.25 per cent per annum if they earn below the Upper Earnings Level, which is currently £50,284 per annum or 3.25 per cent per annum if they earn above the Upper Earnings Level on the total pension contribution they pay. However, many employers do not allow employees to pay contributions via a salary sacrifice arrangement and this generally stems from a lack of understanding of how it works and the benefits it provides to most employees and employers.

What next? The pension industry needs to make employers aware of the benefits of a salary sacrifice arrangement for employee pension contributions and then support employers to help staff understand the system and the benefits to them.

For example, an employee on a salary of £30,000 paying a 5 per cent pension contribution would see an increase in their annual take home pay of nearly £200. For employers, the annual saving is compounded against all of their workforce; if an employer has 100 employees paying a 5 per cent pension contribution with the average salary being £30,000 then the employer will save over £22,000 per annum.

Or course, there is no “one-size-fits-all” arrangement – different employers will have varying membership profiles which will impact on how salary sacrifice is implemented and also, crucially, how it is communicated and managed. Pension and employee benefit consultancies need to be flexible and to tailor a service to meet the employer’s needs. The process of introducing and administering a salary sacrifice arrangement is relatively straightforward, however special care must be taken with employee communication.

To help employees understand the concept, a simple bespoke communication that shows an individual’s payslips before and after salary sacrifice raises the awareness needed and provides workers with the facts, allowing them to see the financial benefits before making an informed decision about joining a salary sacrifice arrangement. If this is compounded with employee group sessions then in our experience this results in a very high take up rate and employees fully appreciate the win-win situation resulting in savings for employees and employers alike.

As businesses and individuals feel the pinch with the increase to NI contributions and the impact of high inflation and increase in interest rates, salary sacrifice arrangements are an effective option requiring minimal effort to initiate. Adopting a salary sacrifice arrangement could make a real and noticeable difference for workers, in terms of take-home pay

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