What’s a wage sacrifice pension? A information for employers

The federal government is eager to encourage individuals to avoid wasting into non-public pension pots.

Due to this, some beneficiant tax breaks can be found. Certainly one of these, referred to as wage sacrifice, may even profit the employer.

On this article, we check out wage sacrifice pensions and the way they work, and reply a sequence of questions you will have about them.

Right here’s what we cowl:

What’s a wage sacrifice pension?

Wage sacrifice is a manner of notionally decreasing a wage to pay for advantages provided by an employer.

These advantages are engaging to an worker, akin to paying for an electrical automobile, or utilizing the Cycle to Work scheme to rent a motorcycle.

Typically these are known as benefits-in-kind, or BIK. Some BIKs are taxed, however others aren’t.

Wage sacrifice will also be used for worker pension funds, and isn’t taxed.

To know the advantages, we first have to debate the present manner workers sometimes pay into their pensions.

Tax reduction is already obtainable on private pension contributions. To make it easy, many employers provide a internet pay association.

This implies the pension contribution is taken from the wage earlier than tax is calculated, and so much less tax is deducted from the pay. Consequently, the worker receives tax reduction on the pension contributions with out having to do something.

Wage sacrifice pension contributions are a substitute for the online pay association that usually works out higher for each worker and employer.

It is usually referred to as wage trade, and, much less generally, SMART (Save Extra and Scale back Tax).

With wage sacrifice pension contributions, a brand new contractual wage is agreed by decreasing the unique wage by the quantity the worker needs to make as a pension contribution.

In trade, the employer pays the identical worth as employer pension contributions on high of any present employer pension contributions (e.g. a minimal of three% as per auto-enrolment guidelines).

As a result of their wage is now successfully decrease, workers not solely doubtlessly cut back the tax they pay—identical to with the online pay association—but in addition cut back their Class 1 Nationwide Insurance coverage contribution (NIC) funds (and, as of 2023/24, funds for the Well being and Social Care Levy).

The worker can use the lowered NICs to fund an elevated pension cost, or cut back the price of contributing total.

Both manner, it’s often extra helpful than utilizing the online pay association, or the choice reduction at supply association.

As a result of employers additionally pay a separate Class 1 NIC (and Well being and Social Care Levy contributions as of 2023/24), that is additionally lowered.

This saving is immediate, with no requirement to say it again at a future date.

On payslips, it may possibly seem as if the employer has made one bigger contribution, with the worker seemingly having contributed nothing.

In fact, this isn’t really the case.

How does a wage sacrifice pension work?

There’s a minimum of 4 phases concerned in making use of wage sacrifice pension contributions.

1. How possible is a wage sacrifice pension?

Making wage sacrifice pension contributions isn’t appropriate for everyone.

It may’t cut back the worker’s pay under the Nationwide Minimal Wage (NMW), regardless of what the worker would possibly request.

Different common or irregular deductions additionally have to be taken into consideration at this level to make sure that they plus the wage sacrifice don’t ever take the wage under this authorized requirement.

Paying lower than the NMW can get an employer in important authorized bother.

Due to this fact, that is one thing employers might want to always monitor if an worker makes use of wage sacrifice (though this may be folded into ongoing payroll duties monitoring auto-enrolment pension standards, akin to whether or not youthful or lower-earning workers change into eligible).

2. Choices for wage sacrifice pensions

Secondly, the worker should have the same opinion that wage sacrifice must be used and that it doesn’t have an effect on any statutory funds (see ‘Disadvantages for workers’, under).

Wage sacrifice pension contributions can’t be unilaterally imposed by employers, though they could default to such a system and ask the worker in the event that they agree. This may be achieved throughout present discussions round pension auto-enrolment.

If the worker disagrees (or just opts out of the pension scheme) then it should be attainable to work with out wage sacrifice deductions.

If the worker agrees to wage sacrifice, they’ll additionally must resolve what proportion of their wage to surrender as wage sacrifice (e.g 5%, 10%).

This will contain them calculating how a lot their gross pay might be lowered, and subsequently how a lot they’ll save by way of decrease earnings tax and NICs.

The employer should resolve in the event that they’re going to move any financial savings they obtain with regard to decrease employer NICs (and Well being and Social Care Levy as of April 2023) to the worker’s pension contributions.

Some employers look to move on financial savings they could make after scheme prices, however it isn’t obligatory.

3. Adjusting the employment contract for a wage sacrifice pension

Thirdly, any present employment contract must be adjusted to say that the worker is in receipt of the profit that’s wage sacrifice pension profit.

Normally, that is achieved by including a clause to the employment contract, which is communicated to workers after they join wage sacrifice, however employers ought to search authorized recommendation on the wording.

It’s price noting that HMRC doesn’t often permit workers to modify out and in of wage sacrifice greater than as soon as in a 12-month interval except there’s a serious life occasion, akin to marriage, divorce, start of a kid, and so forth.

For those who’re uncertain, verify with HMRC’s guidelines and pointers.

4. Making use of wage sacrifice weekly/month-to-month in payroll software program

Lastly, the payroll software program should be configured in order that the wage sacrifice is utilized.

Not all payroll software program is suitable with wage sacrifice, so employers ought to verify with the software program vendor.

Sage Payroll can be utilized for wage sacrifice pension contributions.

If wage sacrifice pension contributions haven’t been undertaken earlier than, this can most likely contain creating a brand new cost/deduction for wage sacrifice.

It will then be utilized within the pensions setup space, with each the employer and worker contributions specified.

Then, throughout payroll, a brand new wage sacrifice line will seem for the worker, with the calculations mechanically utilized to the online wage quantities.

Benefits of a wage sacrifice pension

All people enjoys saving on tax and Nationwide Insurance coverage contributions in a manner that’s not solely authorized however inspired.

HMRC didn’t contact the wage sacrifice pension association when it clamped down in 2017 on tax reduction for different kinds of wage sacrifice (e.g. benefits-in-kind schemes akin to low-emission autos).

That’s as optimistic a thumbs-up as you’ll get.

Listed below are the particular advantages for workers and employers.

Advantages for workers

Staff get to spice up their pensions by way of intelligent efficiencies in a manner that’s more practical in comparison with options.

Or they get to take residence extra pay.

For these paying right into a pension later in life, when their earnings could also be increased, wage sacrifice pension contributions provide a great way to make up for misplaced floor or poor pension efficiency by making bigger funds with out decreasing take-home pay.

It’s additionally attainable for workers so as to add a wage sacrifice bonus or further wage funds.

Once more, these paying right into a pension later in life typically put a lot or all of any yearly bonus straight into their pension to keep away from paying tax on it, or to keep away from pushing their wage into the next tax bracket.

To remain on the correct facet of the legislation with regard to when a bonus is taken into account to be acquired, a call should be made for the sacrifice of the bonus nicely forward of time.

In apply, it’s sometimes achieved earlier than the entitlement to the bonus is revealed.

Advantages for employers

Employers doubtlessly get to avoid wasting important quantities on wage funds in the event that they preserve the NIC financial savings for themselves.

Moreover, pension contributions are an allowable tax deduction.

So with successfully elevated employer contributions, employers may save right here too (though recommendation must be sought from a tax skilled).

However employers want to take a look at the larger image.

Staff are more and more conscious of wage sacrifice, so employers that don’t provide it are at a possible aggressive drawback in relation to recruitment.

If the employer agrees to move on their Class 1 NIC financial savings to the worker’s pension contributions then this may kind one other extremely engaging recruitment issue.

As soon as once more, the worker will get to spice up their contributions with no lack of earnings.

This comes at no further outlay for the employer in comparison with a non-salary-sacrifice association.

Disadvantages of a wage sacrifice pension

As tempting as they’re, it’s mistaken to imagine that wage sacrifice pension contributions are with out points.

And that’s one thing that must be thought-about forward of time.

Right here’s what you want to concentrate on.

Disadvantages for workers

Staff must take care that wage sacrifice doesn’t convey their wage under the decrease earnings restrict (£6,396 per 12 months in 2022/23).

If that occurs, it means they lose future entitlement to the likes of statutory sick pay, maternity pay, paternity pay, incapacity profit, and extra.

Moreover, as a result of the contractual earnings are actually lowered, the extent of borrowing the worker would possibly have the ability to entry might be lowered.

This could impression mortgages specifically. The likes of life assurance will also be affected after they’re set at a a number of of the contractual wage.

Disadvantages for employers

Employers face a doubtlessly increased administrative burden round organising wage sacrifice schemes after which sustaining them.

Nevertheless, it’s attainable to argue that this must be thought-about as half and parcel of any present work carried out for auto-enrolment pensions.

Notably, HMRC doesn’t often take an curiosity in wage sacrifice pension preparations by employers, however it’s clever to maintain any documentation simply in case.

Many companies contemplating wage sacrifice talk about it by way of the HMRC helpline first, or get different skilled steering to make sure compliance.

The admin duties for employers contain a minimum of the next:

  • Educating workers about the potential for wage sacrifice. This consists of the disadvantages talked about above (though this may end up in a win-win for each employers and workers if the latter conform to a wage sacrifice pension). Nevertheless, your pension supplier could have assets you possibly can deploy.
  • Offering a strategy to choose in or out, akin to on-line, or by finishing a paper kind. On-line varieties typically have a wage and pensions calculator to assist workers make one of the best resolution. When opting out, it must be made clear that that is opting in or out of wage sacrifice pension contributions and NOT auto-enrolment (though opting out of auto-enrolment mechanically means giving up wage sacrifice, in fact).
  • Making use of an accurate employment contract clause for workers that choose in. Making certain that it’s issued to workers, that they signal it by means of settlement and authorisation, and that this settlement is stored securely alongside different payroll report conserving.
  • Monitoring worker wages that utilise wage sacrifice. That is to make sure the wage doesn’t fall under Nationwide Residing Wage or Nationwide Minimal Wage ranges (though payroll software program would possibly assist with this and make this job simpler).

Instance of how a wage sacrifice pension works

Jane Smith earns £25,000 a 12 months.

Her employer operates a primary auto-enrolment pension scheme the place it contributes the minimal 3% employer contribution, whereas all its workers contribute 5% utilizing the online pay system.

Utilizing HMRC’s Class 1 NIC payroll checker calculator, we are able to see that earlier than wage sacrifice, the month-to-month Class 1 NICs are as follows:

  • Employer NICs: £199.46
  • Worker NICs: £166.99

Following wage sacrifice of 5% of her earnings, and with Jane now contractually incomes £23,750 a 12 months, the month-to-month NICs are lowered as follows:

  • Employer NICs: £183.78 (saving £15.68 monthly)
  • Worker NICs: £153.19 (saving £13.80 monthly)

Wage sacrifice pension FAQs

Listed below are the solutions to ceaselessly requested questions on wage sacrifice in apply:

How a lot ought to your workers sacrifice for his or her pensions?

The auto-enrolment minimal of 5% worker contribution should proceed to be noticed.

Most workers sacrifice between 5% to fifteen%, relying on their circumstances and necessities with regard to pension financial savings.

What’s the restrict to a wage sacrifice pension?

There’s no limitations on the utmost that may be sacrificed.

Though to keep up tax reduction, contributions can’t exceed £40,000 every year for most individuals.

Can workers choose out of a wage sacrifice pension?

Wage should be a voluntary settlement between employer and worker.

As soon as underway, workers can opt-out, though HMRC could penalise the employer if this occurs greater than as soon as in a 12-month interval except the worker has a great cause.

These embody childbirth, redundancy of the person’s accomplice, and different life-changing occasions.

Closing ideas on wage sacrifice pensions

Wage sacrifice pension contributions provide rather a lot for everyone concerned, with only a few drawbacks.

Whether or not it’s best for you and your workers is a call that you simply’ll must make, maybe by discussing it with HMRC first, or getting different skilled steering.

These discussions also needs to assist guarantee compliance with laws.

Nevertheless, supplied the restrictions mentioned above are noticed, and assuming employers can spare the executive capability to deploy it, each workers and employers stand to realize with out there being any ache.