Salary sacrifice for employee pensions: don’t miss out

If your auto enrolment pension scheme is now bedded in, or if you have yet to reach your staging date, you should consider how a salary sacrifice scheme could benefit both you and your employees.

Larger employers should now have well-established auto enrolment pension arrangements for their employees in place. At the time of implementation, many focused purely on the auto enrolment requirements. “Now, with these schemes up and running, many employers are starting to look at the opportunity offered by salary sacrifice to help mitigate the costs of the pension scheme and potentially improve the overall pension benefits,” says Mark Collins, a business tax specialist in our Employer Consulting team.

This is possibly because national insurance contributions are paid on gross pay before pension, while no NIC is due on employer pension contributions. So if employees sacrifice some pay (i.e. agree to reduced gross pay) and ‘flip’ their former pension contribution into an increased employers’ pension contribution, NIC savings can be made.

“Where employees are making a pension contribution of around 5% of salary, which many will need to do in order to build up a sufficient pension pot, the savings could be worth around 1% of payroll,” Mark says. “For higher paid employees in particular who are making substantial pension contributions, the potential cost savings can be substantial.” Employees end up with the same pension contribution, but pay less NIC. Employers also pay less NIC, and can keep the saving for themselves or split it with their employees. Either way, everyone benefits.

“Smaller employers who have yet to implement their auto enrolment pension schemes might want to think about introducing salary sacrifice at the same time,” Mark suggests. “Why wait to benefit from reduced costs? Our experience with larger employers shows that many see salary sacrifice as worthwhile and a valuable benefit.”

If you’d like to find out more about how salary sacrifice could mitigate your pension costs, please get in touch.