Salary Sacrifice

[booyaka]

This was my understanding I have to admit. The idea being that the company reduces it's liability on pensions.

Apologies for a long winded post incoming - but it's something i deal with fairly often for my clients.

Pension contributions made by salary sacrifice are becoming increasingly popular, as employers recognise the significant cost savings of the arrangement. An employee can surrender part of his salary in exchange for his employer paying an equivalent pension contribution into the pension scheme. The employer then makes this contribution to the scheme on behalf of the employee and, as the employer’s contribution does not attract National Insurance, the net effect is that the amount of NI paid by both the employer and the employee is reduced (by reducing the pay on which both the employee and employer pay NI contributions).

If contractual pay is reduced under a salary sacrifice arrangement the level of pension contributions payable by employer and employee on ‘pensionable salary’ should also be reduced. However, the pre salary sacrifice pay may notionally be treated as ‘pensionable pay’ for the purpose of the payment of contributions or the calculation of benefits.

What are the disadvantages of salary sacrifice?

From the employee’s perspective, the main disadvantage is that their gross salary is being reduced by the amount of the sacrifice. However there are other considerations which need to be taken in
account such as:

• Employees will need to understand the effect on ‘other’ benefits that are linked to their (reduced) salary. However, even although gross salary has reduced, the employer can alter the definition of salary (in rules or conditions) so that, for example, benefits on death, overtime rates and redundancy payments are linked to the pre-sacrificed amount. This is commonly known as ‘notional basic salary’.

• If an employee is thinking of applying for a mortgage they should bear in mind that some mortgage lenders will base the amount that they are willing to lend on the employee’s salary after salary sacrifice. So the reduction in salary may in turn reduce the amount they can borrow.

• There are statutory benefits linked to the lower salary that the employer has no influence over and I've highlighted some areas that would need to be considered :

- Basic state pension - Statutory maternity, paternity
- State second pension and adoption pay
- Incapacity benefit - Statutory sick pay
- Jobseeker’s allowance - Working or child tax credit

Have a look at this

http://www.sites-micro.com/development/salary_sacrifice_calculator/

See if it's benefical to you.

 

[Theophany]

This was my understanding I have to admit. The idea being that the company reduces it's liability on pensions. We've had a similar scheme where they pay us an "non-contractual pay", like a bonus spread over the year. It's still taxable and they can adjust that as they see fit but since it's outside the pay structure, it's exempt from the pension pot and any redundancy benefit should that arise. A bit crafty really but hey, lucky to have a job really.

The company reduces it's liability on pensions? I'm not sure I follow you on that one pal. I think it reduces their NI bill and I guess contributing yourself can reduce their necessity to contribute?

My employer pays 10% of basic, then matches anything I contribute, so a 2.5% contribution from me is a net 15% overall. Unless I'm missing something (and I'm not saying that I'm not!) that can't be bad for my pension... Can it?

 

[Wallace]

If this was avaliable to me i'd go for another 5 days per year to be frank.

I think i'd do the same tbh.

You'd take an extra 5 days a year just so you can be Frank?

Sounds like fun, but what if your name is already Frank? Living the dream?

 

[platypus]

I would certainly do it given the option.

 

[Amp34]

This was my understanding I have to admit. The idea being that the company reduces it's liability on pensions. We've had a similar scheme where they pay us an "non-contractual pay", like a bonus spread over the year. It's still taxable and they can adjust that as they see fit but since it's outside the pay structure, it's exempt from the pension pot and any redundancy benefit should that arise. A bit crafty really but hey, lucky to have a job really.

Isn't the redundancy "pot" taken from an average of your pay over a certain number of months, just to stop this sort of thing?

 

[robgmun]

You'd take an extra 5 days a year just so you can be Frank?

Sounds like fun, but what if your name is already Frank? Living the dream?

At least you'll be drug free.

 

[grimm]

If it is for pension contributions it is the most tax effective way possible, so go for it.

 

[memyselfandi]

We can get various extra benefits via this here ... I don't normally bother to much as I don't want much more than the defaults we get anyway.

We can buy up to 10 days extra leave but given that I get an extra 3 days anyway for long service I've normally got all I need.

 

[Deleted member 66701]

Yes, i do this for 40 days annual leave (plus 8 bank holidays) and usually take 10-15 "unpaid" days leave as well.

 

[Mercenary Keyboard Warrior]

Interesting topic.

I pay into my pension via salary sacrifice, at the same time as changing from non sacrifice to sacrifice our rates changed to allow a higher matching.

Anything that is linked to your actual NI contributions will of course be treating it as if your salary was lower, as to the "outside world" that is your salary. Anything internal I would expect to be based on your "real" salary. Eg payrises, life assurance, overtime rate etc
I would expect your contract in this scenario to be based on your "real salary" then possibly/probably a revised post salary sacrifice "taxable" salary to be shown.

We recently had some financial advisers on site as a requirement to changing into our new pension scheme (good call by employer to my mind to force everyone to do this), and I had quite a discussion with the advisor as being a finance professional myself I was easily able to see the pros and cons of advice he gave me and we discussed it on those terms. I was asking some quite specific questions surrounding property and we discussed mortgages (buy to let and traditional) and he said that the majority of mortgage companies will take your gross salary into consideration providing you can evidence it.
Bear in mind mortgage vetting has moved a long way away from x times salary to looking far more at disposable income and hence ability to pay. He said in his experience they were seeing mortgage companies treating pension payments (be that traditional deduction or salary sacrifice) as better deductions than say phone contracts. They are looking at affordability and most people can reduce pension contributions easier than say a phone contract or a car loan.

Normal rate tax payer will basically save 12% NI, but run some risks of reducing some benefits should they need them.
Higher rate / additional rate taxpayers need to balance it a little more. Historically you could reclaim the tax paid over 20% (so 20% upto 30%), but with salary sacrifice that stops as its deducted gross. The net saving is basically going to be limited to a small amount of NI, and you can end up with less actual cash (but higher pension contributions) depending how you balance the contributions into your scheme now.

One side thing he also told me was that the expectation was that the state second pension (and previous versions eg SERPS) were looking at being scrapped with everyone being entitled to a higher basic state pension and NO supplementary state pensions at all.