- 26th April 2018
- Posted by: Suzy Hill
- Category: Business News
Mitigating the spiralling costs of auto -enrolment
Salary Sacrifice arrangements may offset the spiralling cost of auto-enrolment, benefiting both employers and workers, says Brearley & Co Tax Manager, Andrew Cowe.
“From this month’s payroll run, employers will be feeling the pinch, with a doubling of the cost of their employees’ auto-enrolment pensions”. Employer contribution rates have just increased from 1% to 2%, with another 1% rise pencilled in for next year, placing an ever-increasing burden on businesses”.
“At the same time, the contribution required from the employee him/herself has gone up by 2% (next year’s rise is a further 3%). However, employers may agree with their employee(s) to have their pension payments made under a formal ‘Salary Sacrifice’ arrangement. This is an agreement between employer and employee, changing the terms of the employment contract to reduce the employee’s cash pay. The sacrifice of cash entitlement is made in return for a non-cash benefit, in this case the pension contribution. By the employer making the employee’s pension payment direct, both employer and employee save National Insurance Contributions (NIC)”.
“Pension contributions attract tax relief but not NIC relief”. So if you pay someone £1,000, and they pay £100 into a pension, they only pay tax on £900. However NIC would be calculated on the whole £1,000 at a rate of 12%, costing the employee £120. In addition you must pay employer’s NIC of 13.8%, costing you £138”.
“In the above example, instead of paying cash wages of £1,000, you would pay only £900, but compensate the employee for this by paying the £100 they were putting into their pension. Employer contributions into a pension scheme are already free of NIC. Therefore, by this method the employee still receives the same amount in the pension, and pays the same tax, but both they and you as employer save on your respective NIC payments. In this case the employee suffers only £108 NIC, a saving of £12, and the employer £124.20 (saving £13.80)”.
“Obviously the actual saving in each case depends upon the size of the workforce and their salaries, but they are clearly significant in all but the smallest cases. It is important that schemes are set up formally, with HMRC approval. We are finding that the opportunity to save 13.8% on a significant portion of payroll costs, whilst increasing employees’ take home pay, is becoming increasingly attractive. It really is a ‘win-win’ situation for employer and worker alike”.
Andrew Cowe – Tax Manager – Brearley & Co