The Salary Sacrifice Insight... Sensible, Secure Savings - enjoy simple Tax Benefits, for both Employers and Employees.

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1 The Salary Sacrifice Insight... Sensible, Secure Savings - enjoy simple Tax Benefits, for both Employers and Employees. Reducing costs in your business whilst simultaneously motivating and retaining key staff is entirely possible using Salary Sacrifice. The extra help your staff need to save for their futures in retirement can also come without your company being out of pocket. The resulting good will is not to be sniffed at - happy staff are almost always more productive and loyal. Both employers and their employees can enjoy valuable benefits thereby making their mutual work environment that much more satisfying - financially as well as in other important areas. Salary Sacrifice may also genuinely promote a sense of long term stability and mutual wellbeing within any corporate environment which introduces it to their staff. If you are an employer consider this... You will pay less NICs - this is because you ll be paying your employees a lower salary and therefore your contributions will go down. You can enjoy Corporation Tax Relief - if you pay the amounts your employees sacrifice as an employer pension contribution you can legitimately claim back corporation tax on this contribution. With the proper Salary Sacrifice structure your employees will enjoy higher pensions contributions and you will be the employer that made it possible for them, which they in turn will value. If you agree to reinvest your NIC savings to further increase your staff pensions savings you will position yourself as a caring employer who values their work force - which could help you retain and recruit quality staff. If you are employed consider this... Did you realise that although you may sacrifice some of your salary you could still take home the very same pay each month? You could enjoy valuable tax benefits using Salary Sacrifice. Your pension contributions can be significantly higher. You are pro-actively building a future retirement for yourself that can bring you peace of mind, knowing that your pension will support you properly in retirement. You work for an employer that values your contribution enough to reward you with a solid ongoing financial benefit for you and your family. You should enjoy an ongoing sense of security within your employers service knowing that your future is actively being taken into account by them from a long term perspective

2 What exactly is a Salary Sacrifice anyway? Salary Sacrifice is an agreement set up between Employer and Employee whereby the employee agrees to give up ie sacrifice their right to a specified amount of their future salary or bonuses that they agree upon. In return the employee will receive a non-cash benefit - it could be child care vouchers or private medical care contributions but is typically and perhaps most usefully received in the form of an employer pension contribution. Because the salary is being forfeited in this manner rather than being paid to the employee a two fold benefit to both employee and employer is realised - firstly the employee will not pay income tax or NICS on the salary that is sacrificed in this manner. Secondly the Employer will pay less NIC for every employee that has a Salary Sacrifice arrangement with them like this. There are different options on what the employer and employee may do with the money that is saved by using this simple arrangement - but most commonly Salary Sacrifice is set up so that the employers overall salary bill stays the same while the employees net take home net pay also remains the same. In addition, often the employer then reinvests all of their NIC savings from such an arrangement giving the employee increased pension contributions. This can be very appealing for employees because they see no real decrease in their current standard of living as reflected in their pay packets - it s also probably accurate for them to think of Salary Sacrifice more in terms of them proactively investing in their future rather than them just sacrificing portions of their current wages. The knowledge that the extra pension contributions their employer is making on their behalf via the NIC savings they realised is a powerful staff motivation in itself. Downsides can arise in certain cases though, and we will cover these later in this report so both the advantages and possible disadvantages such arrangements bring for companies and their employees are looked at. A simplifed salary sacrifice explanation? At it s heart Salary Sacrifice is a very simple concept - the employee decides how much of their salary they are willing to forgo and their salary is thereby decreased by that amount. This amount released is then paid into their pension scheme as an employer pension contribution - it s as simple as that.

3 If I m an employer how much can I save? Because your employees will receive a lower salary from you as mentioned earlier your NIC contributions will also reduce. Here s a simple example to show you which should help you estimate your possible NIC savings - just add up the total of employee contributions and then set the 12.8% NIC payment rate against it. For example... NB: These figures are based on rates of income tax and NI for 2008/2009 tax year and are for illustration only Remember that additionally, if you pay the salary sacrificed as an employer pension contribution, you could claim back corporation tax on this contribution too as well as realising the NIC savings. Where salary sacrifice may be used most effectively. Salary Sacrifice can be used individually for a select employee/s but it can be far more cost effective overall to offer it as a company wide plan for all staff. When considering offering pension contributions in lieu of Salary Sacrifice for employees you will need to make sure you have a pension scheme set up that accepts employer contributions. You will not be able to set up a Salary Sacrifice scheme in conjunction with a Section 32 Policy. You can use it with... Personal pensions (including group personal pensions) Stakeholder pensions (including group stakeholder pensions) Occupational contracted-in money purchase schemes Executive pension plans Let s explore some options As mentioned earlier there are various tax and NIC savings which can result from a salary sacrifice arrangement. So which options are open to you? Let s look at some examples in the charts which follow... In the charts following on the next page an employer provides an employee earning 20,000 with a Personal Pension arrangement where both employer and employee are currently paying a pension contribution of 5% of gross salary.

4 Option 1 - Costs go down for the employer while take home pay for their employee increases, but with no increase in pension contribution. The employee above sacrifices 5% of their gross salary with none of the NIC and/ or tax savings being reinvested in the pension scheme. The employee pays less tax and NICs on this reduced salary, so their net take home pay goes up. Option 2 - Costs go down for the employer while take home pay for their employee remains the same, but they get an increase in pension contribution. The employee above sacrifices a slightly higher amount than 5%. The employee pays less tax and NICs on this reduced salary, so their net take home pay goes up. Option 3 - Costs for the employer stay the same while take home pay for their employee increases, plus they get an increase in pension contribution.

5 Option 3 continued... The employee above sacrifices 5% of their gross salary, their take home pay goes up. Their employer reinvests their NIC saving which is what gives them an increased pension contribution. Option 4 - Costs for the employer stay the same while take home pay for their employee stays the same, plus they get an increase in pension contribution. The employee above sacrifices a little more than 5% of their gross salary, so their take home pay stays the same. Their employer doesn t pay anything extra either but reinvests their savings into increased pension contribution... NB: All figures are based on annual tax allowances and NIC thresholds/limits and are for illustration purposes only. Based on rates of income tax and NI for the 2008/2009 tax year and a single person s tax allowance of 6,035. These may be affected by future changes in tax, national insurance contributions, legislation or by an individual s particular circumstances. Too many choices? You can choose whatever salary sacrifice option you wish, but if you re still a little unclear then let me suggest Option 4. This is because for both employer and employee it s a win-win option - as it won t cost either party any extra money, while pension contributions are maximised at the same time. How simple is it to set up really? At the heart of the entire process is an uncomplicated Agreement Letter which you will see an example of at the end of this report. As long as this letter is signed and dated stating that all rights to any salary and/or bonuses sacrificed have been given up for these purposes - and that this letter changes the original contract of employment you re good to go. Then just keep it with the altered employment contract itself and you re done. You will also need to implement this change in your payroll system as well. Rather than explain it all here, I ve put it in a chart for you at the end with two sample agreement letters.

6 Key points for Salary Sacrifice Schemes HMRC state a Salary Sacrifice agreement must be in place BEFORE salary sacrifice is taken. Therefore the future remuneration must be given up BEFORE it is received for Tax or NIC requirements A salary sacrifice cannot reduce employee cash pay below the National Minimum Wage. It cannot be set up retrospectively It can be set up at any time Set up is deemed effective by HMRC if the salary sacrifice letter/agreement is in writing, is dated and signed by both employer and employee The arrangement must make clear that the salary sacrifice has affected/ changed the employees right to remunuration - it must state that the employee is now entitled to a lower cash remuneration plus a benefit instead The employer must alert HMRC of their new Salary Sacrifice scheme and new contract arrangements. Employers need to show HMRC that the employee s cash pay has been lowered and that a noncash benefit has been given by the employer in lieu of it. It s important to note that because Salary sacrifice is a matter of employment law and not tax law it s advisable for employer s legal advisers to thoroughly check any changes to employees contracts of employment. Salary Sacrifice schemes are most often linked in with Annual Pay Reviews etc. This must be written into the agreement and state the period that the Salary Sacrifice agreement is for (12 months in most cases). The agreement should make clear that after this period is over the original employment contract will be reinstated for the employee unless a new employment contract including the salary sacrifice scheme agreement is signed. The Salary Sacrifice agreement will be updated like this every 12 months etc (if 12 months was the period initially agreed upon for the Salary Sacrifice). Important points regarding bonuses. Bonuses may also be treated as employer pension contributions. Either each full bonus may be contributed or simply a portion as agreed upon. Because bonuses are paid to employees in two differing ways they are treated differently when it comes to Salary Sacrifice purposes.

7 Important points regarding bonuses continued On a discretionary basis - this means because the employee doesn t expect to receive any extra/salary bonus in the normal run of things then no change to their employment contract is needed. The employer simply pays in either the whole lump of the bonus or a portion of it as a pension contribution. Very simple - no paperwork required. On a contractual basis - this means a bonus has been written into the orginal employment contract so it means that a change in the employment contract will be required in writing before the bonus payment being made to allow it to qualify for inclusion in the scheme. Points to watch! Okay, you knew that it couldn t all be good news didn t you. Well here s the stuff you generally won t find shouted from the rooftops about Salary Sacrifice Schemes but it s important that you know about them nonetheless. For Employers Payroll adjustments - systems will need amending. See process map A. You may wish to consider linking other benefits such as overtime rates and redundancy benefits to the employee s salary figure prior to sacrifice so that it doesn t negatively impact them. You cannot control statutory benefits, like basic state pension and sick pay in the salary sacrifice agreement. They will be linked to the reduced salary. Costs - yes, I know I mentioned win-win earlier and effectively at the bottom line level salary sacrifice is a cost free, win-win solution when done correctly. However you may find there to be some costs incurred if for example you have to install a new payroll system. You may need someone to administer it, pay their time etc. These first costs could be covered by the employees NIC savings for the first year, then after that when the costs have been met the NIC savings would then be reinvested into the employees pension. Or you could spread costs over a number of years by contributing some of your NIC savings to them with the rest going to pension contributions - the employee would also agree to do their part too by contributing to costs out of their savings until costs were covered. Another area which may throw up extra costs is when it comes to extended sick leave etc. For example if someone is ill for a long period of time, or because they are on maternity leave you will still need to keep making their pension contributions because the salary sacrifice transfers responsibility for pension contributions to you.

8 Points to watch continued... For Employees Your basic state pension entitlement may be reduced - this is because it s linked to your NIC contributions. These will obviously go down after your salary reduces. Statutory sick pay, tax credit and the state second pension entitlements may also reduce because these are linked to your gross earnings. When looking to borrow money for a Mortgage, some lenders may base how much they are willing to lend you on your new reduced salary. Once entered into, you cannot chop and change a salary sacrifice. You will need to see it through until the end of the contract before you can change it - unless certain lifetime events such as marriage, divorce, or childbirth occur which will allow you certain agreed options for change. Your employer will define these events for you. Other than that, as an employee that s pretty much it. As long as you are aware of the above you ll be fine. Let s sum things up then... From this short overview I ve laid out for you, I hope you can see that in most cases the benefits of Salary Sacrifice can outweigh most associated downsides. And the sense of building towards a comfortable retirement within a secure, caring company is a strong benefit for both parties. To finish things up, here are some of the key benefits as to why Salary Sacrifice can be considered as a viable option within any company pay structure. Employers You ll pay less NICs You can claim back Corporation Tax You will position yourself as a caring employer who values their work force - which could help you retain and recruit quality staff. Employees Salary Sacrifice is a very tax efficient way to save for your future Your take home pay remains the same - yet you re saving, without really missing it Your pension contributions are higher - therefore you can enjoy peace of mind that you will likely have a higher pension to retire on. Your employer is giving you valuable help to save for your future

9 The Salary Sacrifice Insight - next steps. Hopefully today I ve shown you that salary sacrifice can work out well for both employers and employees alike. You will need to ensure also that clear HR communications are in place so that staff clearly grasp just what a valuable benefit Salary Sacrifice can be for them. Lack of knowledge or understanding on exactly what Salary Sacrifice is, is a poor price to pay for something which can provide such good ongoing benefits for companies both large and small. If you need more detailed information on this facility then I suggest you discuss options with your choice of Financial Adviser (Independent preferably as they give you advice from what s termed whole of market - meaning they can make recommendations from right across the marketplace and are not tied to representing any one single company or line of financial products). In the meantime please do look at the example letters and HR/payroll process map. William George - Independent Financial Adviser I hope The Salary Sacrifice Insight I ve written for you has helped and if you have any questions on how to make your Group Pensions, or personal Retirement Planning work harder for you, please do give me a call on or visit my website and contact me there - Based in the ancient seat of Scottish Kings, Dunfermline, Fife for sixteen years I have served as a successful Financial Adviser to not only those from my own home town of Dunfermline but also to clients on both coasts in Edinburgh and Glasgow and as far North as Aberdeen. I specialise in Retirement Planning, Mortgage and Investment Advice at Integrity Financial Solutions UK Ltd which is Authorised and Regulated by the Financial Services Authority. Our company is recommended on a weekly basis by Unbiased.co.uk a non-profit organisation who help 60,000 people a month connect with the local Independent Financial Adviser they need quickly and easily. Please do get in touch it ll be good to hear from you... All content William George - This report leaflet is only a guide. It is possible that some of the information is oversimplified, or may become inaccurate over time, for example because of changes to the law. We recommend that you get independent advice before making any financial decisions based on the information in this guide.

10 Salary Sacrifice Example agreement letter [Date] Dear [employee s name] Salary sacrifice With effect from [day / month / year], your salary will reduce from [ x p.a.] to [ y p.a.] The monetary reward has been reduced in lieu of an employer contribution to your pension arrangement. By signing this letter you are confirming your agreement. Please sign both copies, keep one for your own records and return the other copy to [employer s name]. Yours sincerely For and on behalf of XYZ Ltd Date... I confirm I agree to this reduction in salary. Signed... Date... As this agreement constitutes a change to the employee s contract of Contractual Bonus Sacrifice Example agreement letter [Date] Dear [employee s name] Contractual bonus sacrifice With effect from [day / month / year], you will be entitled to a contractual bonus of [ x] of which you have agreed to sacrifice [ y] in lieu of an employer contribution to your pension arrangement. By signing this letter you are confirming your agreement. Please sign both copies, keep one for your own records and return the other copy to [employer s name]. Yours sincerely For and on behalf of XYZ Ltd Date... I confirm I agree to this contractual bonus sacrifice. Signed... Date... As this agreement constitutes a change to the employee s contract of employment, we recommend legal advice be sought.

11 Employer Human Resource/Payroll Process Map