Can both the employer and employee save money when making pension contributions?
Pension salary sacrifice is a method of saving National Insurance Contributions (NIC) for employers and employees and yet it is reported that almost 50% of employers do not have such arrangements in place.
With NIC rate increases (due to the Health and Social Care Levy) from 6th April 2022, there is now a stronger case for employers to consider it as it can lead to a saving of up to 28.3% on employee pension contributions dependent on the level of earnings. The Government has also confirmed it has no intention of abolishing salary sacrifice for pension contributions.
A salary sacrifice arrangement is an agreement between the employer and employee where the employee agrees to a reduction in salary or bonus and in return receives a benefit. The benefit here is a contribution by the employer of an equivalent amount into the employee’s pension scheme. The employee pension contribution therefore becomes an additional employer contribution and there is no difference in the total pension contribution made into the scheme.
Traditionally employee pension contributions attract tax relief but not NIC relief which means the employee has to pay NIC and the employer has to pay NIC. Under a salary sacrifice arrangement, no NIC is payable as the gross pay of the employee is reduced.
On employee pension contributions, for a typical basic rate taxpayer, this would lead to a saving of employee’s NIC of 13.25% and for the employer it would lead to a saving of 15.05% (there could also be an additional saving of 0.5% if the employer pays the apprenticeship levy). Employees can use their savings to either boost take home pay or increase their pension contributions. Employers are also at liberty to share some savings by increasing the pension contributions made for employees.
An increased saving would occur for employers through R&D claims. Provided the employees are linked to R&D activities, the entire pension contributions will be subject to R&D tax relief. Contributions under the pension salary sacrifice are considered employer pension contributions and therefore allowable for R&D purposes.
Under the current economic climate employers should look into offering an improved benefits package for employees where both parties financially benefit. There are many considerations that need to be taken into account in order to ensure that salary sacrifice arrangements are beneficial for both employers and employees as there is no “one fits all” arrangement.
How can Price & Accountants assist?
Our accounting firm in London is equipped with the best accountants and tax advisors that provide clients with tailored advice and support in all tax-related issues and tax planning. We would be happy to go through feasibility for pension salary sacrifice arrangements on a no-fee obligation basis to ensure it can be beneficial to both the employer and employee population. Get in touch with our team right away to learn more.