Salary Sacrifice Pensions: Advice for Employers

What is a Salary Sacrifice scheme?

A salary sacrifice scheme is a contractual agreement between you and your employees where your employee agrees to reduce their future entitlement to cash pay, usually in exchange for a non-cash benefit from you.

Your employee may wish to participate in a salary sacrifice scheme as this reduces the pay which is subject to tax and National Insurance Contributions (NIC). The tax and NIC that they pay will be reduced.

The advantage to you is that your employee reduces pay which is considered for NIC. This then reduces the cost of that employee by the amount of NIC which are saved.

Why should I consider this now?

Employers pay NIC at 13.8% of NICable pay. Nicable pay is calculated by deducting £737 per month from gross pay (in the 2021/22 tax year).

Therefore, if an employee earns £3,000 per month, NICable pay is £3,000 - £737 = £2,263

Employer NIC contributions are calculated at 13.8% - so for £2,263 x 13.8% = £312.29. This is an additional cost to you - and is not deducted from the employee’s wage.

Last year, the Government announced that the rate of NIC contributions would increase by 1.25%, bringing the rate of Employer NIC contributions to 15.05% from 6th April, 2022. At this time, the threshold of £737 will increase to £758 per month.

Therefore, for the same employee earning £3,000 per month, deducting £758 gives NICable pay of £2,242. Taxing this at 15.05% now gives an additional Employer NI bill of £337.42

This is an increase of £25 per month, or £301.57 per year, which a salary sacrifice scheme could help to mitigate.

What other advantages are there?

By offering a salary sacrifice scheme, you are offering employees the opportunity to save for their pensions in a tax efficient way.

Employees may opt to increase their level of pension contribution, rather than taking the increase as net pay.

You could consider using the potential savings in Employer NIC to enhance the pension contributions you make to your employees’ pension pots - boosting employee engagement.

What do I need to consider?

Salary Sacrifice schemes must not be offered to any employee where the reduction in salary would take them below National Minimum Wage. To be successful, a Salary Sacrifice scheme must be contractually agreed before any reduction is administered through payroll.

You should consider the impact on any other pay items you currently offer to employees - such as pay related benefits, overtime, life insurance, salary increments and so on. You should also consider the impact on entitlements should the employee wish to opt in or out in the future.

In order to maximise the potential benefit to both you and your team, it would be sensible to consider how you communicate this with employees.

If this is something you would be interested in, ask your payroll provider for more information.