Pension Salary Sacrifice Scheme

37% of employers are unaware of the National Insurance savings that could be made through salary sacrifice

Encouraging employees to save for retirement is an essential aspect of an employer's responsibility. However, forward-thinking companies can go a step further and help their employees today by introducing a pension salary sacrifice scheme as an alternative way to make pension contributions.

Supporting employees has become more important than ever, with the cost of living crisis impacting everyone with rising inflation and energy costs eating into people’s monthly budgets.

Last month, we conducted research with 500 SME business employers and 500 SME employees and found that over half of employees (52%) are receiving no support from their employers to tackle the cost-of-living crisis. Although some employees said they had been given help – increased financial support (15%), flexible working (12%) and mental health support (4%) – not one employee said their firm had introduced pension contributions through salary sacrifice. 

We also found that many employees and employers are in the dark too when it comes to the benefits of salary sacrifice. 68% of employees are unaware of the National Insurance savings that could be made through salary sacrifice; while 37% of SMEs are also unaware of the National Insurance savings businesses and employees can make through a salary sacrifice workplace pension.

So, what is salary sacrifice and how could it benefit you and your workforce?

Salary sacrifice is an alternative approach to fund pension contributions. In the past, traditional payments involved an employee's net contribution being taken from their net salary after income tax was deducted. The net contribution was then sent to the pension provider by the employer, with (currently) 20% basic tax relief added.

With salary sacrifice, an employee's gross salary is reduced by the amount they want to put into their pension each year but instead of the employee contributing to their pension directly, the employer contribution increases by the amount of salary ‘given up’ and this amount is then sent directly to the pension provider by their employer. Since no tax has been paid on the employer contribution, tax relief does not apply. This means those paying a higher rate of income tax no longer need to claim higher rate tax relief from HMRC and then await a change in their personal tax code to obtain this.

While the net effect on the tax employees pay is the same for both traditional and salary sacrifice methods, the latter reduces the amount of National Insurance payable by both employer and employee, resulting in a higher monthly take-home income for the employee. This additional income could be used to help pay bills or other expenses.

For employers, implementing a salary sacrifice scheme could be an effective way to help encourage pension saving and retain employees. The employer national insurance savings from this scheme could also be used to help provide other benefits such as private medical insurance (PMI), which our survey revealed was the second most popular employee benefit after pensions. With many firms facing talent and skills shortages, offering attractive benefits could help to attract and retain staff.

Want to understand more about a pensions salary sacrifice scheme?

Watch our video below:

Support and guidance

Salary sacrifice is not a one-size-fits-all solution, but it can be a cost efficient way for SMEs to support their employees' retirement planning.

Although implementing a salary sacrifice scheme may seem daunting for some, it does not have to be complicated. However, many SMEs have limited time and resources to dedicate to this process.

To address this challenge, we can provide the support and guidance needed to help SMEs determine if salary sacrifice is right for them. Additionally, our specialist consultants can work with the business to set up the scheme and help them to comply with relevant regulations.