The Win-Win Scenario of Salary Sacrifice for Company Pensions

The Mutual Boon of Salary Sacrifice?

In the ever evolving landscape of financial strategy, salary sacrifice emerges as a mutually beneficial option for both employers and employees.

Here we take a closer look at the benefits for both parties.

Benefits of Salary Sacrifice for Company Pensions for Employers

Reduced National Insurance Contributions:

By endorsing salary sacrifice, the subsequent reduction in National Insurance contributions can translate into significant savings annually.

Enhanced Employee Satisfaction

Reflecting a company’s commitment to its employees, a combined offering of a strong pension scheme and the financial benefits of salary sacrifice can significantly improve staff morale and retention.

Benefits of Salary Sacrifice for Company Pensions for Employees

Lowered Income Tax and National Insurance

By choosing salary sacrifice, employees can diminish their pre-tax salary, often resulting in decreased National Insurance payments and, occasionally, reduced personal tax liabilities.

Boosted Pension Contributions

The money saved can be channelled directly into pension contributions.

This lets employees enhance their retirement savings seamlessly.

An Illustrative Example

Using the tax and NI rates for 2023/24 let’s consider an employee with an annual income of £41,000 who currently has a pension scheme with Nest.

A standard employee on Nest would contribute 5% (less 1% for tax relief) and the employer contributes 3%.

Under these rules the employee will be paying £144.83 as a gross employee contribution.  Nest has banded earnings so £520 is deducted from the monthly gross salary before calculating the 5%.

The employer would contribute £86.91 giving a total contribution of £231.74.

As EEs NI has reduced to 10%, the employee would save £14.49 per month and the employer would save £19.99 per month in employer’s NI.

This is an annual saving of £239.89 for the employer and £173.88 for the employee

For the employer this might seem like a lot of hassle when you consider the implementation costs below but let’s say you have 10 employees then a yearly saving of potentially £2,400 isn’t too bad!!!

Tread with Caution: Potential Pitfalls

While the advantages are substantial, the implementation of salary sacrifice comes with its intricacies.

Key considerations include:

1.       Setup costs and necessary modifications to employment contracts.

2.       Increased administrative demands for payroll teams.

3.       Possible impact on mortgage lending due to reduced gross salary.

4.       Potential repercussions on benefits, like SMP, State Pension and certain contribution-based state benefits.

However, with careful planning and execution, these challenges are surmountable, and no specific clearance from HMRC is required.

The Value of a Review by Friend & Grant

Joining forces with our sister firm, Friend & Grant Wealth Management Ltd, we offer comprehensive reviews of your payroll to highlight potential benefits.

This service, available for businesses with a minimum of 5 employees and a combined pensionable income of at least £200,000, ensures that the tax and NI savings are ongoing, not just a one-time advantage.

Moreover, our collaboration can bring additional perks for employees, from reduced ongoing charges and enhanced investment approaches to opportunities for pension consolidation and protection review.

Intrigued?

Let’s explore how this could benefit your business. Reach out to Mark Friend to delve into the potential advantages and associated costs for your company.

The content in this blog is correct as at 24th January 2024. See terms and conditions.