You might have heard of salary sacrifice (or its less unsettling name, salary exchange) before; you might even have been lucky enough to have this arrangement for your workplace pension, childcare or a cycle to work scheme in a previous job. When it comes to making contributions to your employees’ pensions, it’s the most tax efficient way, saving both you and your employees money. It’s such a win-win that 85% of very large companies are using the scheme. But for smaller businesses, it can seem difficult to implement. So, in this article, we’ve broken down what you should know if you’re thinking of introducing a salary sacrifice pension arrangement for your employees.
Salary sacrifice is an administrative change to your pension scheme
In a normal pension arrangement, you need to contribute a minimum of 3% of an employee’s qualifying earnings into their workplace pension account, and they make up the rest to a minimum total contribution of 8%.
With salary sacrifice, the employee agrees that the employer will pay the full total contribution on their behalf. In return, they ‘exchange’ or ‘sacrifice’ a portion of their salary equivalent to their usual contribution. The result is that the employee’s pension contribution is paid into the pension account BEFORE National Insurance tax is taken on their salary. This means that both the employee and employer stop paying National Insurance on the portion of the salary that is the employees’ pension contribution. That’s a saving of 13.8% of the contribution amount for you as the employer, and 2-12% for the employee depending on their tax bracket.
It’s a simple administrative change that saves both you and your employees money. Any workplace pension scheme can be converted to a salary sacrifice arrangement, so you won’t need to change your provider.
What you need to do to switch over to salary sacrifice
There are five main things you need to do to make sure your switchover is compliant with regulations.
1. Assess your employees for eligibility
It’s important that, when salary is sacrificed, it doesn’t take the headline salary down below National Minimum Wage. You could be fined up to £20,000 per employee and get banned from company directorship for up to 15 years if you don’t comply with the National Minimum Wage. So it’s important to take your employees’ starting salaries into account.
Another thing to take into account is the Lower Earnings Limit. Although this isn’t a legal obligation, if employees don’t meet the threshold over a number of years, they may miss out on their State Pension when they retire. This would be a terrible outcome when the whole point of the workplace pension is to help people prepare for their future! So you should also check if your employees will go under the limit if they opt in.
2. Cap contributions increases
Did you know that for most people, the statutory minimum contributions are around half of what experts say they should contribute to have a good quality of life in retirement? Experts recommend that most people should be saving between 12%-15% of their full salary. So it’s a good idea to let your employees know they can increase their contributions; if they do so, the National Insurance savings generated by salary sacrifice will also go up for both of you. But, you need to bear in mind the thresholds in point 1 (National Minimum Wage and Lower Earnings Limit). You may need to cap their contribution increases to prevent them dipping below these lines
3. Educate your employees
When you switch to a salary sacrifice scheme, you have a statutory duty to educate your employees and gather their informed consent. You will need to explain the concept and present the advantages and possible disadvantages (namely, that those in receipt of statutory benefits like parental pay may lose out by staying in salary sacrifice).
4. Manage opt-ins or opt-outs
You can choose to set up your scheme as an opt-in, where employees agree to the contractual change after being informed about it. Or you can set up your scheme as an opt-out arrangement. This will need special approval from HMRC, and you will need to supply proof of a six-week consultation period, plus some extra paperwork, to prove you have met their standards.
Whichever you choose, you will need to manage the opt-in and opt-out process. You are required to keep records of employee consent to changes and store these so HMRC can access them if needed.
5. Contract updates
When employees become part of the salary sacrifice scheme, you will need to amend their contracts and keep these updated if their contribution levels or salaries change.
Maji can automate this for you
There’s a lot to think about when it comes to making the switchover to a salary sacrifice pension arrangement. That’s probably why very large companies, with dedicated HR and pension teams, have been able to take advantage up to now.
But Maji believes more companies should be able to embrace this win-win scheme. Our platform digitises and automates the process, making it easy and engaging for you and your employees to switch while remaining compliant. Not only this, but we maximise the savings you can make through salary sacrifice by helping your employees increase their pension contributions to the recommended level. And your team will also get access to our host of financial planning and educational tools to increase their financial wellbeing across the board.
We’ll also help your finance team or your accountant ensure your payroll and pension account are set up correctly for salary sacrifice, so that you can start making savings within a month.
We’d love to help you make the switch. Book a demo today.