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.
Salary Sacrifice Pensions
Reducing your pension costs
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.
Sounds 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.
What is Salary Sacrifice?
Salary Sacrifice Pensions (sometimes called salary exchange) is a method used by employers to reduce national insurance liability for them and their employees.
Salary Sacrifice - How much can you save?
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)
Ready to learn more. Let's get started!
What could you do with the savings?
Increase employees' take home pay
Increase employers' pension contributions
Better staff benefits, such as life cover or health cover
Directors pension contributions
HOW MUCH CAN THE EMPLOYER SAVE?
HOW MUCH CAN THE EMPLOYEE SAVE?
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?
1 Office for National Statistics April 2019
2 Assumes 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
1 John’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
2 Employer’s NIC liability is reduced by £13.80 per month. Alternatively, the employer could choose to pay this saving into the employee’s pension.
You could be saving NI and making your employee benefits more attractive.
How to implement a Salary Sacrifice Pension Scheme?
The scheme can normally be set up using your existing pension scheme.
“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
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.
Earnings Related Benefits
Salary sacrifice can affect an employee's entitlement to earnings related benefits such as Maternity Allowance and Additional State Pension.
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
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.