Salary Sacrifice - Pensions

This term refers to a process by which an employer reduces an employee’s salary in return for paying the employee’s individual Pension contributions e.g. if an employee had a salary of £20,000 per annum and paid £1,000 per annum of their own money into their employer’s Group Personal Pension Plan, the employer could instead reduce the employee’s salary down to £19,000 per annum and pay the employee’s Pension contributions themselves.

By reducing the salary by £1,000 per annum this effectively reduces the National Insurance contribution taken from the employee by £110 per annum and also reduces the employer’s National Insurance contributions by £128 per annum.

However, for employee’s earning over £35,000 per annum, the employee’s National Insurance contribution saving would reduce to £10 per annum, although the employer saving would remain the same. The main advantage in running such a scheme is the savings in National Insurance contributions as these are not payable in respect of company Pension contributions.

The main disadvantages are as follows:-

1. These schemes can be expensive to set up both in management time and money.
2. All employment contracts will need to be amended.
3. The reduction in salary can sometimes be a difficult concept to explain to staff and can cause dissatisfaction and mistrust.
4. Many mortgages are based on a multiple of salary, therefore the maximum mortgage an employee may be able to set up could be reduced.
5. Reducing salaries can lead to reduction in State Benefits and the level of an individual’s State Second Pension at retirement.
6. Once the scheme is set up it becomes irrevocable.
   
7. Each scheme must be approved by HM Revenue & Customs and there is a chance that if these schemes become too popular and lose the State too much in National Insurance contributions then they may become disallowed.

Summary

Due to the complexity and costs of setting up such a scheme, it only becomes feasible for companies running Pension Schemes with in excess of 250 members.