Salary sacrifice has grown in popularity to become mainstream, with 70% of UK pension schemes using it as the default method of making contributions (Aon Benefits & Trends Survey) . So what is preventing the remaining 30% of organisations from implementing this efficiency? Is it a lack of understanding, the workforce demographic, or do some organisations simply not have sufficient resource to manage the switch?
How does salary sacrifice work?
Salary sacrifice is an efficient and cost-effective method of paying for employee benefits. It happens when an employee makes a contractual agreement with their employer to give up part of their salary in return for the employer providing a non-cash benefit.
With the reduced salary, both employers and employees save on National Insurance contributions and income tax, which can then be used to boost pension contributions and increase their overall value over time. In effect, salary sacrifice means employees can make the same contributions for a lower cost, or higher contributions for the same overall cost.
Since April 2017, both and tax and national insurance savings have been available by means of salary sacrifice for the following products:
- Cycle to work
- Childcare schemes
- Low emission car schemes
Salary sacrifice and workplace pension contributions
According to the ONS, the median pay for a UK employee was £30,420 in 2019. The minimum contribution for a workplace pension scheme is 5% of pensionable salary. If this contribution were to be paid by salary sacrifice the national insurance saving for this single employee would be £209.89* per annum pre the April 2022 NI increase. Employers with over one hundred employees will therefore typically save over £20,000 per annum, which may be enough of a saving to introduce, enhance, or subsidise another employee benefit.
*Assuming pension contributions are based on Set 3.
Pension salary sacrifice is a smart way to expand the range of employee benefits offered by an organisation, boosting recruitment and retention, whilst offsetting some of the cost of implementing the scheme.
Five things to consider when implementing a successful salary sacrifice project
1. Build the business case
Firstly, it is important to accurately predict the benefits of introducing salary sacrifice, remembering to build in an allowance for any employees who may opt out. You should also allocate a portion of the potential savings to cover the cost of providing resource to ensure the changes are implemented correctly.
2. Appoint appropriate support
Consider if the business has sufficient time and expertise to manage the transition project, to build and deliver appropriate communications, and to deal with employee queries. If you’re unsure of your capabilities, it may be most efficient to outsource the process to a consultant with experience of managing similar projects.
3. Assess the pension provider
Check whether the pension provider can process contributions by salary sacrifice. Is the current pension proposition attractive to employees? Consider whether the implementation of salary sacrifice also provides an opportunity to upgrade the workplace pension scheme.
4. Decide how you’ll allocate the employer national insurance savings
Consider the options around the optimum use of the employer national insurance savings. Whatever split is agreed regarding the employer savings, it is important to remember that employees will also benefit from the scheme by receiving higher take home pay.
Make sure you inform employees that the workplace pension arrangements are being reviewed. It may be appropriate to survey employees to gauge their opinion on any proposed changes. This gives employees time to understand and accept changes, which then supports a smoother transition. Agree with your consultant the best method of communicating the changes, and consider that different people within your workforce will prefer different types of communication.
Is salary sacrifice right for your organisation?
In these times where company finances may be under pressure, coupled with the increasingly tough battle to recruit and retain the best talent, salary sacrifice may well be a cost-effective solution.
Working with an experienced employee benefits consultant ensures that the transition and ongoing management is straightforward and efficient, and that you’re always compliant with any legislative changes.