PAYROLL - 22.04.2021

Using salary sacrifice for a cost-free pay rise

End of an era

The tax advantages of some salary sacrifice schemes for employees, e.g. those involving company cars, which were in place before 6 April 2017 finally came to an end on 5 April 2021. A small number of other schemes can still be used to obtain tax savings but they are of limited application because the benefits they provide won’t suit all, e.g. provision of childcare. However, there’s one type of salary sacrifice that can be used by most employees.

Pension contributions

Salary sacrifice which involves an employee giving up some of their salary in exchange for their employer paying into a pension scheme isn’t subject to the restrictions imposed by HMRC in April 2017. The main reason for this is probably that even before then it didn’t result in any tax savings.

Tip. Whilst there’s no tax advantage to pension contribution salary sacrifice schemes, they can still be used to reduce NI contributions for both employers and employees.

Pension-related salary sacrifice

What makes schemes involving pension contributions more useful than other salary sacrifice arrangements is that most employees either belong to a workplace pension or contribute to a personal pension plan of their own. In either case as an employer you can use this to offer a pay rise to your workers in the form of extra pension contributions at no cost to you.

Example. Despite making losses over the last year because of tough trading conditions, Acom Ltd wants to reward its employees. It can do this at zero cost by entering into a salary sacrifice agreement to pay its employees’ workplace pension contributions. Below is an illustration of how it would work for one of Acom’s employees.

Jack’s annual salary is £48,000 and his workplace pension contributions are £3,000. That’s £250 per month, which after basic rate tax relief is £200. Acom deducts this from Jack’s salary. It agrees to pay his pension contributions (plus a little extra) in exchange for him giving up salary of £3,529 per year. While Jack is giving up more salary than he saves in pension contributions, he will receive the same net pay because his NI contributions are lower. At the same time, Jack’s pension fund is better off because Acom pays the £3,529 it saves by paying him less salary along with the £487 in employers’ NI it saves. A zero cost to Acom and Jack his pension fund is boosted by £4,016 per year - effectively a pay rise of 2.12% (see The next step ).

Tip. For 2021/22 a pension-related salary sacrifice produces better results for employees whose earnings are £50,270 (the NI upper earnings limit) or less than those with higher earnings. But in both cases there’s an advantage.

Tip. To be valid it’s important that you get the paperwork for a salary sacrifice right. You must also make your employees aware of all the consequences. If in doubt consult with your accountant or an employment specialist.

For the detailed calculations behind the example, visit https://www.tips-and-advice.co.uk , Download Zone, year 21, issue 14.