Business owners: The essential basics about salary sacrifice pensions
Salary sacrifice schemes could offer employees a tax-efficient way to boost their retirement savings. It could benefit your business too, so they are well worth considering.
If you’ve been thinking about salary sacrifice pensions or want to explore how you could expand your workplace benefits, read on to discover what they could mean for your business.
What is a “salary sacrifice” pension?
In simple terms, salary sacrifice means that an employee gives up some of their salary in exchange for a benefit. In this case, that benefit would involve you, as their employer, making higher contributions to their pension.
From the employee’s perspective, a salary sacrifice has two key benefits:
It increases their pension savings. As you will contribute more to their pension each month, their pension pot will grow faster.
It could reduce tax liability. As their income will be lower, Income Tax and National Insurance could deductions fall. In some cases, the income difference is negligible due to the savings.
As a result, employees choosing a salary sacrifice pension are often financially better off in the long term, while giving up relatively little now.
For employers, offering this option can deliver both financial and non-financial benefits.
The financial benefits of providing a salary sacrifice pension
From an employee’s perspective, the additional pension benefits could outweigh the salary sacrifice they’re making. In some cases, they may be better off financially day-to-day too, as their Income Tax and National Insurance contributions will fall.
The extra pension contributions benefit from tax relief, boosting retirement savings further. As the money will usually be invested, it has the potential to deliver long-term returns too.
So, it’s easy to see why, for an employee, a salary sacrifice pension can make sense financially. But how does it financially benefit employers?
While you’ll be contributing more to your employee’s pension, your employer NICs will fall, which could deliver a saving overall.
Salary sacrifice could boost employee satisfaction
As well as tangible financial benefits, salary sacrifice options could boost employee satisfaction.
Having more options to choose what’s important to them and an opportunity to save more efficiently for retirement can improve employee wellbeing. A salary sacrifice pension could help your team to feel more confident about their retirement and long-term financial security.
This step could also make your business more attractive to talent in a competitive job market.
To make the most of this benefit, it’s important that you effectively communicate what salary sacrifice means to your employees and how they could benefit from it. Including the details in documents like an employee handbook, regularly mentioning it during team meetings, and including it in job adverts can help.
Working with a finance professional to engage with employees can also increase how many people make use of salary sacrifice options. For instance, we could speak to your employees to help them calculate exactly how salary sacrifice would affect their income now and what it would mean for their retirement.
If you’d like to work with us to improve financial education and wellbeing in your business, please contact us.
What steps do you need to take to set up a salary sacrifice scheme?
As an employer, it’s likely you already have a pension scheme in place for your employees under auto-enrolment. So, setting up a salary sacrifice scheme could be easier than you think and it’s something we could help with.
If an employee agrees to take a salary sacrifice, you will need to update their contract. You can usually do this by adding a clause that explains the details of the scheme. You will also need to update your payroll process to include the new figures for gross salary and tax.
Tax savings you make through a salary sacrifice scheme are instant – you don’t need to claim them back.
Do you want to learn more about salary sacrifice and employee financial education?
Whether you want to discuss the pros and cons of salary sacrifice with an expert or arrange for a financial adviser to talk to your team, we can help. Please contact us to discuss your business needs and how we can work together.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.