| |
Employer salary costs
Although for a Salary Sacrifice Scheme the employer contributes
to the employees pension, the reduced employee salary and employers
NI costs mean that there is no difference in the payroll cost
to the employer as follows.
| No cost change for employer |
| |
Current Scheme
(£) |
Salary Sacrifice
(£) |
|
24,000 |
22,209 |
|
3,072 |
2,843 |
|
0 |
2,020 |
|
27,072 |
27,072 |
| Example - Assumes for the Current
Scheme that the employer does not make a contribution
to the employees pension. |
|
|
Although the above scheme is cost neutral for the employer,
an employer may wish to establish a scheme where the contribution
to pensions is 10% of payroll.
Lower scheme costs
A Salary Sacrifice Scheme offers a number of benefits
to the employer, in particular up to a 68% reduction in costs
for operating such a scheme where the contribution to this
pension scheme is 10% of payroll.
The following table shows an example of the employers payroll
costs and actual or intended percentage contribution to pensions.
|
30 |
|
£24,000 |
|
£720,000 |
| |
Intended pension contribution |
|
10.00% |
| Example - Assumes the employer does
not pay into a Current Scheme although the employee
may do or have a separate pension. |
|
|
Typically a new Net Pay Scheme such as group personal or
stakeholder pension would require both the employee and employer
to contribute to the employees pension plan. Therefore should
for example 30 employees contribute say 5% of their net pay
or £36,000 net per annum the employer may also contribute
£36,000 gross per annum or 5%.
For a Salary Sacrifice Scheme the employer would contribute
on a 2 for 1 basis, this means that whatever the net cost
to the employee, double is invested by the employer to the
pension or £72,000 gross per annum and no contribution
is made by the employee as seen in the following table.
| Cost of 10% pension to employer |
| |
Current Scheme |
Salary Sacrifice |
|
36,000 |
72,000 |
| |
Less: Salary sacrifice (£) |
|
0 |
53,730 |
|
0 |
6,870 |
|
36,000 |
11,400 |
|
5.00% |
1.58% |
| Example - Assumes that the total
employee contribution for the Current Scheme is
£36,000 and £0 for Salary Sacrifice
scheme. |
|
|
For the Net Pay Scheme the cost to the employer is 5% of
payroll. However, for the Salary Sacrifice Scheme the employer
invests in the employee's pension the savings made from the
salary sacrifice and employers NI, £53,730 pa and £6,870
pa respectively. As a result the pension contribution is only
£11,400 pa or a cost of only 1.58% of payroll.
The cost saving for the employer if every employee became
a member is 3.42% of payroll, that's £24,600 per annum
or 68% less than a Net Pay Scheme. This represents a significant
saving on an existing scheme or a new scheme to be established
where the contribution is 10% of payroll. Furthermore, as not every employee will join the Salary Sacrifice
Scheme, the cost of these schemes is typically less than 1%
of payroll.
Scheme benefits
Where there is no pension, the employer can introduce a Salary
Sacrifice Scheme either as a group personal or stakeholder
pension based on a 10% employer contribution.
For the employee:
| • |
Compared to the employee investing
5% net to a pension or £1,538 pa gross, this would
mean an extra 56% being invested by the employer or £2,400
pa; |
| |
|
| • |
The 10% can be paid to the employee's
own pension as part of a low charging group personal or
stakeholder; |
| |
|
| • |
The scheme is easy for the employees
to understand; |
| |
|
| • |
It rewards employees for their efforts; |
| |
|
| • |
It offers valuable and enhanced retirement
benefits to the employee whereas before there may be none. |
| |
|
| • |
At retirement the employee can use this pension fund to purchase an annuity, before making a decision regarding this pension income, learn more about annuities, compare annuity rates and secure a personalised annuity quote offering guaranteed rates. |
For the employer:
| • |
A Net Pay Scheme costing 5% of payroll
can be reduced by a Salary Sacrifice Scheme to a maximum
of 1.58% or a 68% cost saving; |
| |
|
| • |
As not every employee will join, the
cost of the Salary Sacrifice Scheme is usually less than
1% of payroll; |
| |
|
| • |
The scheme assists in retaining quality
employees, especially where other employers do not offer
a Salary Sacrifice Scheme; |
| |
|
| • |
The scheme can help in recruiting new
employees, for example where other employers do not offer
a Salary Sacrifice Scheme; |
| |
|
| • |
If the existing pension is an occupational
money purchase scheme it takes away the responsibilities
and concerns of being a trustee as this is not required
by group personal or stakeholder pension that would be
established by a Salary Sacrifice Scheme; |
| |
|
| • |
It is easy to implement and administer. |
Change existing scheme
A salary Sacrifice Scheme will use either a group personal or
stakeholder pension as a pensions vehicle. The scheme can be
set-up for all employees or only for those that opt for salary
sacrifice. Any fund built-up within Current Arrangements can
be left in those funds or transferred if it is in the employees
interest.
In the majority of cases the current Net Pay Schemes will be
either an occupational money purchase, group personal or stakeholder
pension.
The full benefits of changing existing arrangements could be
as significant as establishing a new scheme for both employees
and employer and the actual benefits will depend on the existing
contributions to the pension.
Other changes
Changing an employees salary may have implications on other
aspects of their finances that they need to be award of as follows:
| • |
Mortgage multiples are
based of salary so the total amount that can be borrowed
could decrease. However, this would not be the case where
the Salary Sacrifice was deduced from the gross amount
on the pay slip; |
| |
|
| • |
For S2P there would be a reduction
in this amount as the gross salary has been reduced. However,
as S2P is averaged out over lifetime earnings the reduction
would be small compared to the gain in pension from a
Salary Sacrifice Scheme; |
| |
|
| • |
The maximum contribution to pensions
is based on gross salary multiplied by a percentage, up
to 40%. Therefore in theory a reduction in gross salary
would reduce the maximum possible payment to a pension.
However, in practice very few employees do pay the maximum; |
| |
|
| • |
For maternity payments the first 6
weeks are paid at 90% of average earnings but the last
20 weeks are paid as a flat rate of £100 so salary
sacrifice would have a limited detrimental impact; |
| |
|
| • |
In the case of redundancy, salary sacrifice
will only have an effect where earnings are less than
£250 per week as statutory redundancy is linked
up to this amount of salary; |
| |
|
| • |
Where the employer offers life assurance
as a multiple of salary a reduction in salary would reduce
the total amount of life cover. |
|
