My employer is offering me a salary sacrifice and bonus sacrifice arrangement. Is this worth doing and what do I need to be aware of?
In addition to income tax, you pay National Insurance contributions on salary and bonus. For the 2009/10 tax
year, these are generally 11 per cent for earnings from £110 a week to £844 a week and 1 per cent above this amount.
The 11 per cent figure is lower (9.4 per cent) for those people who are contracted out of the state second pension via a salary-related pension. In most cases, employers pay a flat rate of 12.8 per cent employer NICs on all employees’ earnings above £110 per week. There is no 1 per cent NIC rate for employers. NIC rates are due to increase from April 2011. For those employees who want to reduce their NIC liability and boost their
pensions, it can be advantageous to sacrifice remuneration, with the sacrificed amount being applied as a pension contribution by their employer.
The attraction can be further increased if the employer is prepared to apply all or part of their saving in employer NIC contributions as an additional contribution to the employee’s pension plan. Some employers will generously add the full 12.8 per cent back in to your pension and others often split it 50/50 with you, thus boosting your pension contribution by 6.4 per cent. You need to check your
employer’s attitude to this.
However, you need to understand the following risks – you may not be able to revert to your pre-sacrifice salary if your circumstances change.
Your ability to borrow could be reduced. This could affect the levels of mortgage, personal loan or credit card limit that you can obtain.
Other salary-related elements of your employment package, such as contractual pension contributions, life insurance and income protection
(PHI) cover may be affected. Entitlement to some state benefits could be affected by the salary sacrifice and any future redundancy package could be based on the lower number.
Many employers offering salary sacrifice facilities have changed employment contracts and pension scheme rules to base salary related elements of their employment package on a notional (pre-sacrifice) salary. This is often referred to as a reference salary and this scheme popular with employers who offer a flexible benefits package.
Entitlement to state benefits, such as the state second pension (S2P), statutory maternity pay, statutory paternity pay, statutory adoption pay, statutory sick pay, means-tested benefits or tax credits are earnings- related.
This means that agreeing to a pay cut under a salary sacrifice arrangement could have an effect on an individual’s entitlement to these benefits. Our view is that where clients have the choice of salary sacrifice and bonus sacrifice, the latter is preferable as bonus is not generally contractual and sacrificing this will have much less impact on other benefits.
Where employers are happy to rebate a proportion of their NIC savings, then both salary and bonus sacrifice can represent an excellent way of making the most out of your money.
However, even where employers are prepared to rebate some of their NIC savings, care needs to be taken, particularly with salary sacrifice. I understand that you are not affected by the “high-income individual” rules at present but if your income rises in the future, special care needs to be takenwith this too.
Jason Witcombe is director at Evolve Financial Planning