In these straightened times, salary may be preferable to receiving a benefit. However, the attraction of salary sacrifice has increased since 6 April, and when it comes to pensions it makes sense to take a longer-term view.
Salary sacrifice typically involves an employee – who is contributing to a pension scheme – making an agreement with their employer to forego an equivalent amount of salary in return for the employer paying pension contributions on their behalf.
This reduces gross salary so employee NICs are saved at either 13.25% or 3.25%, boosting take home pay.
To be successful, a salary sacrifice arrangement has to meet several conditions:
- The right to receive salary should be given up before the employee becomes entitled to it.
- The arrangement must genuinely reduce the employee’s entitlement to salary in exchange for provision of a benefit (it does not apply where a non-contractual bonus is involved).
- The employee should not be able to give up the benefit at any time they choose and return to the original salary level.
Unsuccessful salary sacrifice
HMRC has recently updated its salary sacrifice guidance. It includes an example of an unsuccessful arrangement using the case of an employer with 20 employees.
Each month, the employees transfer their pension contributions to the employer, who then makes a single payment to the pension provider. Joining the scheme and the level of contributions are entirely optional. Each employee’s salary is then reduced by the amount of their pension contribution.
The salary sacrifice is not successful as the employees are merely directing the employer to apply part of their salary on their behalf to pay pension contributions.
Given the cost-of-living crisis, many employees may prefer to have cash in their pockets even if this impacts on their pension savings or means giving up a tax advantageous benefit.
Any arrangement can be cancelled, or the sacrifice reduced, after 12 months. It is also possible for an employee to opt out earlier if they experience a lifestyle change which significantly alters their financial circumstances.
A lifestyle change covers a change of circumstances due to Covid-19, marriage, divorce or a partner becoming redundant or pregnant.
Employees need to carefully consider any change. If the sacrifice involves a leased company car, they may face an early termination penalty. Putting salary sacrifice contributions on hold for three or four months may be preferable.
If you are reviewing the total reward package you offer to your team, it is worth looking at tax savings the employer and employee can benefit from from the range of benefits that qualify under the salary sacrifice scheme. Get in touch with Emily or Heather to arrange a consultation.