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- Before implementing a salary sacrifice pensions arrangement ensure it is viable for the business.
- Employee contracts need to be changed to show the change of salary, but minimum wage laws must be adhered to.
- Get HM Revenue and Custom approval and make sure employees understand all the pros and cons.
- Determine how the employer national insurances savings will be used.
Making pension contributions through salary sacrifice can bring savings, but there is a lot to consider, says Jennifer Paterson
Almost 60% of employers allow their staff to make pension contributions via salary sacrifice, according to the Employee Benefits/Johnson Fleming Pensions Research 2010. The attraction is the savings to be made, because employer pension contributions do not attract employer national insurance (NI), whereas if the employee makes their contribution out of net pay, employer’s NI has already been paid on the full salary.
By allowing staff to make contributions via salary sacrifice – which is an agreement between employer and employee to reduce gross salary by a certain sum and replace it with employer contributions to the pension scheme – the employer can cut its NI bill.
The starting point is to determine whether salary sacrifice is viable for the organisation. Steve Herbert, head of benefits strategy at Jelf Employee Benefits, says: “Employers have got to start by looking at their employee population in the pension scheme, seeing how many make personal contributions and how many are in the right salary brackets to make it worth looking at salary sacrifice.”
How will savings be used?
Another part of the process is to establish how any savings will be used. Sharing the savings makes the scheme more attractive to staff. Simon Fletcher, co-founder of Johnson Fleming, says: “We like to see sharing where the employee keeps a fixed amount and the employer keeps the rest. The NI saving has been triggered by the employees agreeing to make the sacrifice, which is why a lot of employers like to feed it back to staff.”
Employers must also deal with pre-sacrifice (notional) salary and minimum wage issues. The employer and employee must agree either that the pension contribution is calculated on the notional salary, if the scheme rules permit, or change the contribution percentage so the same amount is paid into the employee’s pot. Alan Morahan, principal at Punter Southall, says: “The employer needs to maintain a reference salary to use for ongoing employee benefits, so pension contributions, life assurance, income protection and bonus payments would all be driven off the reference salary.”
Some staff may be involved in multiple salary sacrifice plans, such as childcare vouchers or bikes for work, and Jelf’s Herbert warns: “The cumulative effect of two or three salary sacrifices could drop them below minimum wage.”
HM Revenue and Customs compliance
It is also vital to ensure schemes comply with HM Revenue and Customs’ (HMRC) requirements. Employees’ contracts need to be changed and payslips must show evidence of the new arrangement. Documentation should be issued to the employee and sent to HMRC for approval. Johnson Fleming’s Fletcher says: “HMRC will sometimes make some commentary, but it will not approve a scheme until it has taken place. Therefore, employers need to have a process that is very robust and correct.”
The whole process is expedited if, when a pension plan is implemented, it has permission written into its rules to use salary sacrifice at some point. Alastair Kendrick, director of employment tax services at Mazars, says: “If it has not got that agreement from the HMRC, it can take up to 12 months to get it.”
Employees must understand the changes, preferably through a face-to-face presentation. Alison-Jane Bailey, head of policy and technical development at the Pensions Advisory Service, says: “Employees need to be able to make an informed decision, so the onus is on the employer to ensure it has enough information to understand the benefits and downsides to salary sacrifice.”
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