WORKPLACE SAVINGS BENEFITS: EMPLOYER PENSIONSGUIDE SALARY SACRIFICE: EMPLOYERS HANDBOOK. We ve put together this handbook to help clarify the technical aspects of offering salary sacrifice to your employees. We explain how it all works and the potential benefits, so that you can decide whether it s the right thing for your company or organisation.
2 WORKPLACE BENEFITS: PENSIONS Salary sacrifice (also referred to as salary exchange amongst other names) is an arrangement whereby an employee agrees to exchange part of their gross salary in return for a non-cash benefit, for example a pension contribution. As the salary is sacrificed before being paid, both you and your employee pay less National Insurance Contributions (NIC). As the employee s gross salary will be reduced before it s paid, a change to their contract of employment is required. You can then reduce their salary as agreed and the sacrificed amount can be paid into their pension plan or towards an alternative non-cash benefit.
WORKPLACE BENEFITS: PENSIONS 3 BENEFITS OF SALARY SACRIFICE. EMPLOYER BENEFITS EMPLOYEE BENEFITS Salary sacrifice allows you to increase employee benefits at no extra cost. As your NIC will be reduced, the savings made can be passed on to your employees in the form of pension contributions or another benefit. Alternatively, you may wish to re-invest the savings back into your business. As the employee s NIC is reduced, the savings made can increase their take home pay or be paid towards their flexible benefits, for example an increased contribution to their pension. Other benefits may include: Your employee will receive an increase in child tax credits or regain part or all of their entitlement to child benefit where salary sacrifice reduces earnings assessable to tax to under 60,000. If your employee is a higher rate taxpayer, they will get higher rate tax relief immediately on the pension contribution instead of claiming it from HM Revenue & Customs (HMRC). Those employees who earn in excess of 100,000 may have the chance to regain their personal allowance, depending on the size of their salary and the amount they choose to sacrifice. EMPLOYEE THINGS TO CONSIDER A reduction in salary might affect other benefits such as group life assurance or permanent health insurance. Any potential redundancy payments may also be affected, as would any planned mortgage borrowing, as these are worked out upon your net annual salary. However, most employers use a notional salary (the pre-sacrificed amount) to calculate such figures. Employees can find out how salary sacrifice may affect them by using our salary sacrifice calculator at: www.legalandgeneral.com/salary-sacrifice
4 WORKPLACE BENEFITS: PENSIONS YOUR SALARY SACRIFICE OPTIONS STANDARD SALARY SACRIFICE OR SMART. So here s how a standard salary sacrifice scheme differs from that of a SMART (Save More and Reduce Tax) scheme: Standard redirects the employee s NIC savings, effectively increasing their take home pay, but producing the same pension contribution amount. You must agree the terms of this arrangement with your employee before any reduction is made and this must be documented in writing, signed and dated. Before salary sacrifice Take home pay Income tax NIC Pension contribution After salary sacrifice Take home pay Income tax NIC Pension contribution SMART Save More and Reduce Tax redirects NIC savings into the employee s pension scheme, effectively increasing their contribution. Before salary sacrifice Take home pay Income tax NIC Pension contribution After salary sacrifice Take home pay Income tax NIC Pension contribution
WORKPLACE BENEFITS: PENSIONS 5 SUMMARY Method of salary sacrifice Costs to employer Employee s net take-home pay Employee s pension contributions Standard employee s NIC redirected to salary Reduced Increases Remains the same SMART employee s NIC are redirected to pension Reduced Remains the same Increases Under either Standard or SMART you can also pass on your employer s NIC saving to increase their pension contribution. SMART (SAVE MORE AND REDUCE TAX). As mentioned above, you can also adopt salary sacrifice using SMART. Using this method your employee receives the same take-home pay they would have received had they made their pension contribution from their pay, but they benefit from an increased pension contribution. For example: John currently pays 10% of his salary into his personal pension arrangement. The table shows the benefits of making a pension contribution through SMART salary sacrifice as opposed to making a contribution from net pay. It assumes that only the employee reinvests their NIC and the full personal allowance is available. STANDARD SALARY VS SMART SALARY SACRIFICE (2016/2017) Standard salary 25,000 SMART salary 22,058.82 Income (net) 20,167.20 Income (net) 18,167.20 Pension contribution (net) 2,000 ( 2,500 gross) Pension contribution (gross) 2,941.18 Take home pay 18,167.20 Take home pay 18,167.20 With the SMART method, you don t need to get consent prior to the arrangement going ahead. Instead, you just need to communicate to your employees that the scheme is going ahead at a specific future date and you must give them sufficient time to opt out.
6 WORKPLACE BENEFITS: PENSIONS HM REVENUE & CUSTOMS (HMRC). As long as the employee is no longer entitled to the earnings after the sacrifice, HMRC should not object to a salary sacrifice arrangement. Anything else may be considered a redirection of earnings, for example salary deductions, rather than salary sacrifice. In all cases, the final decision on whether a sacrifice is effective will be down to the individual s local Inspector of Taxes. MAKING CHANGES TO THE ARRANGEMENT. Members can usually terminate or set up a new salary sacrifice arrangement at any time subject to company policy, scheme rules, HMRC practice and the type of benefit being provided in exchange for the sacrificed salary. A change to the contract of employment may be required if an arrangement is to be cancelled. BONUS SACRIFICE. Like salary sacrifice, bonuses can also be exchanged in return for a non-cash benefit. Therefore, your employee doesn t pay income tax on the sacrificed amount and neither you nor your employee pay NIC on it. Your employee can either sacrifice their entire bonus, a percentage of their bonus, or set a limit above which all of the bonus will be sacrificed. You will then reduce the value of their bonus payment before it is paid. Where an employee has no prior entitlement to the bonus, for example it s non-contractual, it can only be sacrificed before they become entitled to it. The table below illustrates the difference in value between your employee taking the bonus as cash or investing it in their pension, based on an employee earning 25,000. This example shows the 138 employer NIC saving being reinvested. However, this is entirely at your discretion. 25,000 BASIC PAY 20% TAX PAYER Bonus as taken cash Bonus invested in pension Bonus gross value 1,000 Income tax - 200 Employee NIC - 120 Employer NIC reinvested 1,000 138 Take home cash/pension investment 680 1,138
WORKPLACE BENEFITS: PENSIONS 7 FOR HIGHER RATE TAX PAYERS Due to the savings in income tax and NIC, it can work out quite beneficial to your higher earning employees. The table below illustrates the difference in value between taking the bonus as cash or investing it in your pension, based on an employee earning 50,000. This example shows the 138 employer NIC saving being reinvested. However, this is entirely at your discretion. 50,000 BASIC PAY 40% TAX PAYER Bonus taken as cash Bonus invested in pension Bonus gross value 1,000 Income tax - 400 Employee NIC - 20 Employer NIC reinvested 1,000 138 Take home cash/pension investment 580 1,138 ADDITIONAL INFORMATION. Please also note: Pension contributions through salary and bonus sacrifice are treated as employer contributions. A salary sacrifice arrangement cannot take an employee below the national minimum wage. Earnings must not drop below the Lower Earnings Limit as the employee would lose their right to State benefits. Legal & General cannot advise you on whether salary or bonus sacrifice is right for your company. You should speak to your financial adviser for further information.
You may wish to consult your financial adviser(s) on any investment options. Please be aware that Legal & General do not offer or provide financial advice, and where members invest their money remains their choice. www.legalandgeneral.com/workplacebenefits Legal & General Assurance Society Limited Registered in England and Wales No. 166055 Registered office: One Coleman Street, London EC2R 5AA We are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Q0039596 03/16 H0158961