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A growing number of companies are saying they will use salary sacrifice schemes to build up their employees’ pension plans to reduce the impact of the tax changes announced in the Budget.
Companies including J. Sainsbury’s, J.D. Weatherspoon and BT this week attacked Chancellor Rachel Reeves’ plan to raise up to £25bn a year by increasing national insurance contributions for employers from April next year. did.
The move has sparked interest in salary sacrifice schemes, where employees give up part of their salary in exchange for employers paying it directly into employees’ pensions.
Although well-established among large employers, this system is less common among small and medium-sized enterprises, where employees can receive a lower maximum wage and therefore pay less income tax. However, employers’ national insurance is not taxed on employee pension contributions, so there is now more incentive for businesses to take advantage of these schemes.
A survey of around 900 UK companies commissioned by a global financial institution found that more than one in five small business owners will use salary sacrifice schemes to make pension contributions in the wake of the Budget. “The trend is increasing.” Payroll Association.
From April, the salary threshold that employers will start paying into NI will be reduced from £9,100 to £5,000, and the tax rate will rise from 13.8% to 15%.
Nick Bastin, director of employment tax at CPA Hayes McIntyre, said his conversations with clients since the budget were “almost exclusively about pension salary sacrifices”.
Some small and medium-sized enterprises can take advantage of the expanded employment benefit to help mitigate the NI increase, but not all businesses meet the criteria. “We’re talking to technology companies with small numbers of employees, organizations in the healthcare sector, and education sectors,” he said.
Small businesses have traditionally shied away from such schemes because of the complexity of the payroll process, but advisers said this was likely to change.
“Historically, it hasn’t been worth the hassle for companies,” said Robert Salter, director at business advisory firm Brick Rosenberg. “That would mean a weekly salary sacrifice,” he added.
Under current auto-enrolment pension rules, the total minimum contribution for a qualified pension plan is 8 percent of an employee’s income, of which 3 percent must be paid by the employer. If an employee takes up a pension salary sacrifice scheme, all 8 per cent (or more depending on the pension scheme) is paid by the employer.
“The key question in any case is what happens to the employer’s NI costs saved. Generous employers pass it all on to their employees in additional pension contributions, but they always do so. “There is no guarantee that it will be the same,” said Tom McPhail, a pensions expert at a consultancy. Lang cat.
Steven Leigh, associate partner at professional services firm Aon, calculates that a small business with 10 employees and an income of £35,000 per head will see their NI bill increase by £9,200 after the budget changes.
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However, by paying 5 per cent of an employee’s income into a pension instead of wages, the company would save £2,625, offsetting around 30 per cent of the increase in employer NICs. Employees can save around £140 a year on employee NICs.
“The vast majority of companies with 100 or more employees will already be offering this,” Lee says. “It’s becoming even easier for companies that don’t offer it.”
Advisers warn that when assessing the merits of salary sacrifice schemes, employers need to be careful to ensure that employees’ cash earnings do not fall below the minimum wage.
“This is a big risk that companies need to consider,” said Neil Carberry, chief executive of the Recruitment & Employment Confederation, a trade group for recruiters. “The minimum wage has risen by 26% in the last three years, meaning any salary above £20,000 could be blown away.”
Employees should also be mindful of statutory maternity benefits, Lee added. “Statutory maternity pay is linked to salary at a particular point in time. So if someone takes advantage of salary sacrifice, their salary may fall below a certain level, in which case the statutory maternity pay The level of benefits may be even lower.
For higher-earning staff, the benefits of sacrificing their salary include being able to save more in their pensions to overcome frozen income tax bases. Staff reaching the £60,000 threshold, where child benefit starts to be withdrawn, could potentially save more in their pension and keep more of their benefits. Similarly, parents on the verge of £100,000 may be able to keep valuable childcare benefits such as tax-free childcare or ‘free’ childcare time.
Additional reporting by Claer Barrett
