Opportunity to create NIC savings for employers and employees
Pension salary sacriﬁce works by an employee sacriﬁcing an amount of pay equivalent to their employee pension contribution. In exchange for this “sacriﬁce”, instead of the employee contributing to the pension scheme, the employer increases the corresponding employer pension contribution by the same amount.
Employees do not receive Class 1 NIC relief on their pension contributions. Therefore, reducing an employee’s pay and substituting this with an equivalent employer pension contribution, which is NIC free, results in both the employees and the employer saving NIC.
As a result:
- The employees’ pay, net of tax and NIC will increase;
- The Company’s employer NIC liability will reduce;
- The total contributions made to the pension scheme remain unchanged, and, if applicable;
- The Employers Apprenticeship Levy payments will be lower, as the liable amount is calculated by reference to employees’ gross pay, which has been reduced by the sacriﬁ ce arrangement.
What are the potential savings and why should you consider this arrangement now?
The savings are calculated by reference to the total annual level of employees’ contributions into the pension scheme. Whilst many larger employers have already entered into an arrangement of this type, a lot of middle market businesses, who introduced pension schemes for their employees as a result of pensions auto-enrolment, have not. This was typically because either they did not consider salary sacriﬁ ce or they thought that the potential savings for the business, and their employees, did not justify the cost of implementing the arrangement.
This position changed for many businesses when the level of employee contributions payable under auto-enrolment increased from 1% to 3 % in April 2018, and from 3% to 5% in April 2019. An effective 400% increase in employee contributions in just 12 months.
This rise in employee contributions has a signiﬁ cant impact on the potential NIC savings that an employer can achieve. For example:
- If the annual level of total employee auto-enrolment contributions into the scheme at 1% (pre 6th April 2018) were £20,000, the potential total of annual employer savings were only £2,760 (£20,000 x 13.8%);
- From 6 April 2018, the employee auto-enrolment contribution rising from 1% to 3%, increased the total employee pension contributions to £60,000, and the potential annual employer NIC savings are £8,280;
- From 6 April 2019, the employee pension contribution rising to 5% increases the total employee pension contributions to £100,000 per annum, and the potential annual employer savings are £13,800.
Effective employee communication is key to successfully implementing pension salary sacriﬁ ce, and to achieving a high employee take up rate and savings for the Company. It is important that employees are aware of, and understand, the changes being made, and that this can be demonstrated to HMRC so that they can agree that the arrangement is tax compliant.
At Smith Cooper our Employment Tax team have been implementing pension salary sacriﬁ ce arrangements for clients for many years. We work with you to ensure that our experience in implementing these arrangements provides you with practical and commercial solutions that deliver maximum savings for the business.
For expert advice, get in touch with a member of our team.