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The government introduced auto-enrolment in 2012 as a way of helping more people save for their retirement. It made it a legal obligation for all UK employers, regardless of size, to auto-enrol eligible staff into a workplace pension.
As this was such a big change, the government introduced NEST as a default workplace pension provider. This was to help make it easier for employers to set up and manage auto-enrolment. Being the default option, many employers set up NEST. They did this without really understanding how it worked or what alternatives there were.
Fast forward 10 years and a lot has changed. Employers now have a lot more options.
NEST is now just one of many workplace pension providers on the market. As an employer, you have the opportunity to choose a provider which is more suited to the needs of your business and its employees. How schemes are managed, and the technology used has improved significantly too. This makes it easier for employers to stay on top of their schemes.
When NEST was originally set up, the majority of pension schemes were set up using a net pay method rather than salary sacrifice. As a result, many businesses and their employees have, and continue to miss out on the benefits salary sacrifice has to offer. This includes Income Tax and National Insurance Savings.
In our latest benchmarking survey we found that 44% of British businesses aren’t utilising salary sacrifice. This is staggering when you think about the potential savings that are being lost for both employees and employers.
So you don’t miss out, we’ve highlighted some of the top reasons you should consider using salary sacrifice for your workplace pension below. But first, what exactly is a salary sacrifice pension?
A salary sacrifice workplace pension, otherwise known as salary exchange, is like other salary sacrifice benefits. Just like cycle to work or an Electric Car Scheme, it is a contractual agreement between you, the employer, and your employees.
The agreement allows staff to sacrifice part of their gross salary in exchange for a non-cash benefit. In this instance, it’s pension contributions.
Your employee contractually agrees to sacrifice part of their gross salary, in exchange for pension contributions. By doing this, your employees can benefit from big Income Tax and National Insurance (NI) Savings.
When using salary sacrifice, employees effectively give up some of their gross income. For example, if an employee earns £35,000 a year and agrees to sacrifice 5% (£1,750) for pension contributions, their gross salary would reduce to £33,250. They would then only pay tax and National Insurance on the £33,250 rather than the £35,000.
With net pay, although contributions are taken from an employee’s gross salary, it doesn’t reduce like with salary sacrifice. So in this case, an employee earning £35,000, wanting to make 5% contributions, would still only be charged income tax on £33,250. However, they would get charge NI on their full gross salary of £35,000.
Net Pay Vs Salary Sacrifice | Net Pay | Salary Sacrifice |
|---|---|---|
Salary Sacrificed | £0 | £1,750 |
Gross Annual Income | £35,000 | £33,250 |
Employee Tax | £4,136 | £4,136 |
Employee NI | £1,794.40 | £1,654.40 |
Employee NI Saving | £0 | £140 | Total Pension Contribution | £1,750 | £1,750 |
As you can see from the above, two employees with the same salary and pension contributions can end up in very different situations, just as a result of how their contributions are made.
It’s not just the employees that are affected by this either, employers could also make National Insurance savings as a result of using salary sacrifice.
Salary sacrifice offers many benefits to employers. However, as many aren’t aware of what these are, they are missing out. We’ve highlighted some of the top benefits below.
A workplace pension via salary sacrifice offers National Insurance savings for you, the employer. By agreeing to exchange some of their salary for pension contributions, employees reduce their gross income. As a result of this, you will pay less National Insurance. The lower an employee’s gross income, the lower your National Insurance contribution.
Below we have provided an example of how much you could save based on:
Employer National Insurance Savings | Before Salary Sacrifice | Salary Sacrifice |
|---|---|---|
Employee Salary Exchange | £0 | £1,750 |
Employee Gross Salary | £35,000 | £33,250 |
Employer National Insurance | £4,500 | £4,237.50 | Employer Savings | £0 | £262.50 |
The above outlines the savings you could make as a result of offering salary sacrifice for just one employee. The savings soon add up when you apply this to all employees. To help highlight these savings, we’ve put some examples below.
Number of Employees | National Insurance Saving |
|---|---|
10 | £2,625 |
25 | £6,562.50 |
50 | £13,125 |
As you can see, the potential NI savings for your business are huge. When it comes to these, you have a few options in terms of what to do with them. As an employer, you can:
Passing back these savings on to your employees can provide a really valuable benefit. With the cost of living at an all time high, every little helps.
By helping boost income, you can also help to improve your workforces overall financial and mental wellbeing, which comes with a host of other benefits for your company.
A valuable and comprehensive employee benefits package can boost engagement and retention. In fact, it can give your company leverage over your competitors and attract the best talent.
Our 2022 Workplace Pension Survey backs this up. 56% of workers consider pension contributions to be important when choosing an employer. Another 41% said they were, in fact, one of the most important employee benefits.
If you add your NI savings to your employee’s pension pot, you’re going the extra mile as an employer. Not only can you help them save for retirement, you can also help them save cash every month. This can go a long way in keeping your best workers on your team. Your staff will feel valued at work too, which can boost engagement and productivity.
SPECIALIST TIP 🤓
Salary sacrifice can be offered to all employees, however the amount they sacrifice can’t take them below minimum wage.
In our 2023 Employee Benefits Survey, we found that 43% of respondents were concerned about money. This is worrisome, as poor financial health can lead to problems in other areas of life. Worrying about finances may cause employees to:
Companies are offering workplace financial education to combat these problems. Your employee benefits, including your workplace pension, can support their financial health. When communicated well to your team, it gives you a chance to educate them about pensions.
With a better understanding of pensions and the benefits, they’ll be less likely to opt out. Staff will be able to prepare for retirement and the lifestyle they want with your help.
At Drewberry™, we help businesses of all sizes in all industries to set up their workplace pension. We can also offer individual pensions advice. If you need help, get in touch on 02074425880 or email help@drewberry.co.uk
Michael Cairns-Marshall
Employee Benefits Consultant
The great thing about salary sacrifice pension contributions is that your employees can benefit too. We’ve outlined how below.
The tax savings are what make a salary sacrifice arrangement appealing to employees. They can save for retirement and make extra savings.
The money they sacrifice towards their pension comes from their salary before tax. This means that they don’t pay National Insurance or Income Tax on contributions. Employees only pay tax on their remaining income after salary sacrifice.
To highlight the potential savings, we’ve put an example below. It compares an employee contributing via salary sacrifice versus one that isn’t. Both employees earn £35,000 and want to contribute £1,750 (5%) to their pension.
Salary Sacrifice Savings | Before Salary Sacrifice | Salary Sacrifice |
|---|---|---|
Salary Exchange | £0 | £1,750 |
Gross Salary | £35,000 | £33,250 |
Tax | £4,136.00 | £4,136.00 |
Employee National Insurance | £1,794.40 | £1,654.40 |
Employee Pension Contribution | £1,750 | £1,750 | Take Home Pay | £27,319.60 | £27,459.60 | Through salary sacrifice an employee can save £140 a year! 🤩 |
As an employer, you have the means to boost your employee’s pension pot through salary sacrifice. If you pass on your National Insurance savings, their pension increases at no extra cost to you. This is attractive to employees as they experience no loss of earnings. It also helps boost their pension savings.
Here’s an example of the extra pension contributions your employees can get.
Employer NI Savings Passed Back | No NI Pass Back | With NI Pass Back |
|---|---|---|
Pension Contribution | £,1750 (5%) | £,1750 (5%) |
Employer NI Savings | £262.50 | £262.50 |
Employer NI Pass Back | ❌ | ✅ |
Employee Total Pension Contribution | £1,750 | £2,012.50 |
Throughout this article we’ve talked about simple salary sacrifice, however, there is in fact another option you can choose. This is known as SMART (save more and reduce tax) salary sacrifice.
As outlined above, simple sacrifice enables employees to save NI and tax on their pension contributions. With this method, the NI savings get put back into the employee’s net pay, so their take home pay increases.
With SMART salary sacrifice, the NI savings get added to their pension contribution rather than their net pay. To put it simply, with simple your employees take home pay increases. With SMART it doesn’t, but their pension contributions do.
To help explain this further, we’ve provided an example below. As with the above examples, this is based on an employee earning £35,000 and wanting to make 5% pension contributions.
Simple Vs SMART | Simple | SMART |
|---|---|---|
Salary Exchange | £1,750 | £1,750 |
Gross Salary | £33,250 | £33,250 |
Tax | £4,136.00 | £4,136.00 |
Employee National Insurance | £1,654.40 | £1,654.40 |
Employee NI Savings | £140 | £140 |
Employee Pension Contribution | £1,750 | £1,890 | Take Home Pay | £27,459.60 | £27,319.60 | Employees can increase pension contributions by £140 via SMART 🤩 |
If you were to pass back your employer National Insurance savings on top of using SMART salary sacrifice, your employee’s pension contributions can be boosted even further.
Additional Employer NI Pass Back | ||
|---|---|---|
Employee SMART Pension Contribution | £1,925 | £1,925 |
Employer NI Pass Back | 50% | 100% | Total Pension Contribution | £2,056.25 | £2,187.50 |
As you can see, there are many benefits to choosing to pay pension contributions via salary sacrifice. However, we think you’ll agree when we say workplace pensions aren’t straightforward. There are many factors to consider and it can get confusing.
Being responsible for people’s retirement savings is daunting. You want to make sure you do the right thing to make sure your workforce gets the best returns, but there is so much to consider. This is why it’s always best to speak to a pensions specialist, like one of the team at Drewberry. They can guide you through everything and make sure you get the best outcomes for your business and staff.
Speaking to a financial adviser is recommended to ensure you’ve set up your workplace pension correctly. It’s common for many employers not to understand how to set up a scheme for their staff. A financial specialist can help your company to set your workplace pension up and implement it via salary sacrifice.
It’s not just employers, though. We discovered in our 2022 Workplace Pension Survey that 48% of workers don’t understand the tax relief or what salary sacrifice is. We offer ongoing support and can help with communications to ensure your team understands their pension.
If you’d like help with your salary sacrifice scheme, please don’t hesitate to get in touch with us. Our team is always happy to help. Contact us today on 02074425880 or email at help@drewberry.co.uk.
Employee benefits can be a headache. But our specialists do this day-in, day-out, offering first class service when you need it most. Here’s why you should talk to us:
