Pension contributions under Auto Enrolment are by default split between employer and employee:
- Employer contributions must be at least 2% (rising to 3% on 6 April 2019)
- Total contributions must be at least 5% (rising to 8% on 6 April 2019)
Many employers simply treat the difference (currently 3%) as employee contributions. The problem with this approach is that whilst all contributions are effectively “tax free”, only employer contributions are also free of National Insurance. Employee contributions are paid out of earnings that have suffered both employee NI (12%) and employer NI (13.8%).
However, if the employer simply pays the whole 5% total pension contribution, thereby avoiding any NI on the pension payments, the employer has effectively paid the employee a higher salary package!
One solution to this is to carry out a salary sacrifice. By reducing gross pay under a salary sacrifice arrangement it is possible to maintain employee net pay; not increase employer cost; increase payment in pension and reduce payment to HMRC. The pension contribution can be 30% to 50% more than it would be without salary sacrifice at no cost to employee or employer.
This is effectively sanctioned by Government as an intended tax relief opportunity. Most salary sacrifice arrangements were recently outlawed but those relating to pensions (and some other tax free benefits) were specifically sanctioned as allowed to continue.
To implement this will require professional advice. Book a discussion with us about this at any time.