Salary Sacrifice Pensions - Workplace Pensions Direct

Salary Sacrifice & Pensions

Reducing your pension costs

Salary Sacrifice – How to reduce pension costs

A business in the UK with 200 employees on average earnings of £30,420 could save around £40,000 every year by using salary sacrifice for their workplace pension. Not only would the business save money but the pension scheme members could also see an increase in their take home pay or benefit from higher pension contributions.

Sound too good to be true?

WPD Group have been helping employers introduce salary sacrifice schemes for many years. Use our calculator to get a rough idea of how much you could save.

Contact us to find out more

What could you do with the savings?

  • Increase employees’ take home pay
  • Increase employees’ pension contributions
  • Better staff benefits, such as life cover or health cover
  • Directors pension contributions

Salary Sacrifice – How much can you save?

What is Salary Sacrifice

Salary Sacrifice (sometimes called salary exchange) is a method used by employers to reduce national insurance liability for them and their employees

The Benefit of using Salary Sacrifice

It saves the employer and the employee money, and it’s legal!

What’s it used for

  • Childcare Vouchers (closed to new entrants since October 2018)
  • Cycle to Work schemes
  • Pensions (including advice)

How it works with pensions

The employee has their salary reduced by the same percentage of earnings as would normally be deducted for their pension. The employer pays the same amount into the employee’s pension.

How much can the employer save

The employer saves up to 13.8% of the amount paid by the employee into their pension.

EXAMPLE – employer savings

Based on average earnings of £30,4201

How much can an employer reduce their National Insurance Contributions liability?

Number of employees1050100500
Potential Saving Per Year£2,099£10,495£20,990£104,950

1Office for National Statistics April 2019

2Assumes that pensionable earnings are the same as average earnings

Pensionable Earnings – Definition

These examples are based on Basic Earnings as the defintion of pensionable earnings.

Other options are available, such as:

  • Qualifying Earnings
    • Monthly earnings below £520 or above £4,167 are ignored
  • Total Earnings

How much can the employee save

The employee saves up to 12% of the amount they pay into their pension as a personal contribution

EXAMPLE – individual savings

John Smith has pensionable earnings of £2,000 per month

Employer pays 3% of earnings as a pension contribution

Employee pays 5% of earnings as a pension contribution

 Before Salary SacrificeAfter Salary Sacrifice
Pensionable Earnings£2,000£1,900
John's Pension Payment£100nil
Employer's Pension Payment£60£160
Total Pension Payment£160£160
John's take home pay1£1,574£1,587
Reduction in employer NIC2n/a£13.80

1John’s take home pay increases by £12 per month. Alternatively, he could make an additional payment to his pension. Based on an adjusted personal allowance of £12,500 per annum

2Employer’s NIC liability is reduced by £13.80 per month. Alternatively, the employer could choose to pay this saving into the employee’s pension.

How to implement a salary sacrifice pension scheme

Pension Provider

The scheme can normally be set up using your existing pension scheme.

“Opt-in” or “opt-out”

“Opt-in”

With this method the employer provides employees with the option of using salary sacrifice and implements specific processes to ensure compliance

“Opt-out”

Pension scheme members are automatically enrolled into the salary sacrifice scheme. They can, if they wish, opt-out of using salary sacrifice.

Different procedures are used for each of the above methods.

Consultation Period

In certain circumstances, employers have to consult with their employees, or their employees’ representative, before certain changes can be made to their pension scheme. The requirement to consult covers changes to occupational and personal pension schemes. Note – the purpose of the consultation is not to obtain the consent of those consulted, but to inform them and give them the opportunity to provide feedback to the employer on the proposed change(s).

Communication / Education

Employers need to communicate carefully the introduction of a salary sacrifice scheme.

  • Clear and concise personalised letters with full details of how the changes will impact on the individual
  • Group presentations explaining how it all works and the implications
  • Individual meetings to discuss an individual’s own situation

Employment Documentation

A salary sacrifice scheme will amount to a change to employees’ terms and conditions of employment. For a scheme to be effective (and supported by HMRC), employers will need to ensure employees have effectively agreed to a variation of their individual employment contracts.

We can put you in touch with dedicated employment lawyers to ensure that your HR documentation complies with the necessary formalities

Be Aware of!

Payroll

Due to the complexities of salary sacrifice it is of paramount importance your payroll processor fully understand how it works and is able to make amendments each payroll run if required.

Minimum Wage

A salary sacrifice arrangement can’t reduce an employee’s earnings below the national minimum wage rates. This means that payroll needs to be able to monitor this constantly.

Earnings Related Benefits

Salary sacrifice can affect an employee’s entitlement to earnings related benefits such as Maternity Allowance and Additional State Pension.

Contribution based benefits

Salary sacrifice may affect an employee’s entitlement to contribution based benefits such as Universal Credit and State Pension. It may reduce the cash earnings on which National Insurance contributions are charged.

Your quote
Initial
£excl. VAT WPD Fees
£ Available Cost Savings
Ongoing
£excl. VATper month WPD fees
£per annum Available Cost Savings

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*Monthly fee initial 24 month contract: See Fees for details

Assumptions: 2016/2017 tax year – £26,500 average pay – 15% average staff turnover. Available ongoing cost savings are from salary exchange, earnings definition, postponement for new starters, employee charges, employee lost investment return, and employer charges.

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