Employment law governs salary sacrifice, which is the term used when an employee’s terms and conditions as related to remuneration are varied in return for a non-cash benefit such as childcare vouchers or a regular pension contribution.
Under a salary sacrifice scheme, the employer will pay pension contributions on behalf of the employee in return for a reduction in salary. The benefit for the company is a lower National Insurance bill while employees also pay less NI and income tax because they are earning less.
Just so you are aware, HM Revenue & Customs will not comment on the suitability of a salary sacrifice scheme before it is set up but they need to see details of the scheme and will not allow the tax savings unless the employee receive a reduced salary as evidenced by their employment contract or pay slips.
This is one of the reasons why you will need professional advice to set up a scheme.
You should inform your employees that they should consider carefully the effect, or potential effect, that a reduction in their pay may have on their future right to the original (higher) cash salary, any pension scheme being contributed to, entitlement to working tax credit or child tax credit, state pension or other benefits such as statutory maternity pay.
Also bear in mind that a salary sacrifice cannot take pay below national minimum wage rates, the only exception being the benefit of accommodation provided by the employer.
By contributing to a pension through salary sacrifice, the contribution will be benefiting from 20 or 40 per cent income tax relief, but the rules have become more complicated recently.
A number of changes were announced in the last Budget which will affect high-earners. Chancellor Alistair Darling said that from April 2011, for individuals earning more than £150,000 a year, tax relief will gradually be tapered from 40 per cent down to 20 per cent for those who earn more than £180,000.
This is in line with the 20 per cent relief for basic-rate taxpayers. But the Government has pre-empted employers seeking to circumvent the tax changes with salary sacrifice schemes. Another Budget change affecting highest- earners and pensions prevents anyone earning more than £150,000 from increasing their normal pattern of pension contributions between now and April 2011 or from increasing their total employer and employee annual payments beyond £20,000 a year, known as “a special annual allowance”.
Above this allowance, tax relief on pension savings will be at the 20 per cent basic rate only, which is designed to prevent employers introducing salary sacrifice to reduce the individual’s income to below the threshold. Salary sacrifice schemes that already exist for anyone lucky enough to be earning more than £150,000 will not be affected as long as the contributions are less than £20,000.
In general, successful communication of the benefits of opting for salary sacrifice results in a high take-up rate from employees, which in turn increases the employer’s NI saving and often encourages staff to join the pension scheme in the first place.
Kim North is director of Technology and Technical firstname.lastname@example.org