Government Support for Salary Sacrifice
In recent years, there were concerns that the practice of making pension contributions through salary exchange (also known as salary sacrifice) might be discontinued. This topic has been a recurring point of discussion in the financial press, with fears that it might be affected by budget changes. However, the good news is that this method of pension contribution has not been abandoned. The government has clarified its support for salary sacrifice for pension contributions, bringing relief to companies already using this approach.
Financial Benefits for Companies
This not only saves them money but also eliminates the need to modify employment contracts. Under this method, companies can save 13.8% by no longer paying national insurance on the exchanged amounts.
Options for Utilising Savings
Some businesses retain these savings for budgetary purposes or offer additional benefits to employees. Others boost pension contributions by passing on part or all of the savings.
Employee Considerations
The decision is up to the company, and there’s no definitive right or wrong choice.
For employees, the financial benefits depend on their tax situation. It’s crucial for individuals to grasp the tax implications before agreeing to a salary exchange. In simple terms, salary exchange involves giving up a portion of salary and receiving an equivalent non-cash benefit, such as a company pension contribution.
Tax Savings for Employees
To illustrate, for basic rate taxpayers, contributing £100 traditionally costs them £80 net. Through salary exchange, they avoid paying 12% national insurance on the exchanged amount, reducing the net cost to £68 for the same £100 contribution. Higher rate taxpayers pay only 2% national insurance on earnings above £43,000, rather than the standard 12%. This means they can save by this margin.
For them, the key advantage of salary exchange is avoiding the need to reclaim tax differences, making the net cost £58 for a £100 contribution. However, implementing salary exchange isn’t without complexities. Aspects like national minimum wage, state benefits, employee age, and tax thresholds must be considered.
Seek Guidance for Smooth Implementation
Companies planning to adopt this approach should seek guidance to avoid pitfalls. While other salary exchange schemes, like childcare vouchers and cycle-to-work programs, might face future scrutiny, the option to use salary exchange for pension contributions remains viable. It’s a valuable tool for companies and employees, and its future looks secure—unless a future chancellor decides otherwise.
Simplifying Salary Sacrifice with Automation
We make the entire process seamless through automation. Our automated workflow for employment contract amendment and the Husky app make the implementation of Salary Sacrifice a simple task.
We ensure that the transition and the monthly administration is fully compliant, the paperwork and contracts are accurate, and that both employee and employer will positively benefit from a pension scheme such as this one.
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We setup and manage your pensions, payroll, and salary exchange—all in one place, ensuring compliance every step of the way.
