With effect from 6 April 2018 the total level of contributions into Automatic Enrolment Pension Schemes will increase from 2% of relevant remuneration (which has to include a minimum 1% employer contributions), to 5% (which has to include a minimum 2% employer contribution). That is quite a jump in cost for both the employer and the employee, and with effect from 6 April 2019, the total contribution will increase to 8% (with a minimum 3% employer contribution).

Coming on top of the recent introduction of the Apprenticeship Levy, many of our clients are looking again at ways of managing and reducing the impact of these additional costs.

As a result, many businesses that previously considered introducing a Pension Scheme Salary Sacrifice arrangement, but rejected it because they considered that the potential savings were not significant enough, are now reconsidering their options.

What is a Pension Scheme Salary Sacrifice Arrangement?

Pension Salary Sacrifice works by an employee sacrificing an amount of pay equivalent to their employee pension contribution. In exchange for this sacrifice, the employer increases the corresponding employer pension contribution by the same amount.

Employees do not receive Class 1 NIC relief on the pension contributions they make. There is, however, no NIC due on contributions the employer make. Therefore, reducing an employee’s pay and substituting this with an equivalent employer pension contribution, which is NIC free, results in both the employee and the employer saving NIC.

As a result:

• 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 Employer’s Apprenticeship Levy payments will be lower, as the liable amount is calculated by reference to employees’ gross pay, which has been reduced by the sacrifice arrangement.

What are the potential savings?

The savings are calculated by reference to the total annual level of employees’ contributions into the scheme.

Therefore, if the current total annual level of employee auto enrolment contribution into the scheme is £20,000, with effect from 6 April 2018, that annual contribution level will increase to £60,000. This is as a result of the employee contribution rising from 1% to 3%.

By operating a salary sacrifice arrangement, with effect from 6 April 2018, the potential annual savings for the employer are £8,280. The total employee annual savings are up to £7,200.

In addition, the total payments liable to the Apprenticeship Levy will reduce by £60,000, a potential additional saving to the employer of £300.

When the auto enrolment rates increase again in April 2019, the current £20,000 (1%) annual level of employee auto enrolment contributions will be £100,000 (5%). In that year, by operating a salary sacrifice arrangement, the employer’s potential annual NIC savings will be £13,800 and the total employees savings will be up to £12,000.

The potential Apprenticeship Levy savings for the employer would be £500.

Once implemented, an efficient pension scheme salary sacrifice arrangement delivers year on year savings for both the employer and employees.

Practical considerations

Effective employee communication is key to successfully implementing pension salary sacrifice, and to achieve 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.

At Smith Cooper, our Employment Tax team have been implementing pension salary sacrifice 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 to ensure a successful implementation.

Next steps

If you would like to understand what potential savings are available to your business, and how Smith Cooper can help you to manage the introduction of a successful arrangement, please give one of our Employment Tax team a call.