Salary Sacrifice for Auto Enrolment Pensions

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Pension contributions under Auto Enrolment are by default split between employer and employee. From the 6 April 2019:

  • Employer contributions must be at least 3%
  • Total contributions must be at least 8%

Many employers will simply treat the difference (currently 5%) 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 8% 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. As the percentage is about to increase further the impact of this saving is even more significant.

Please note that a salary sacrifice arrangement will result in the employees needing a new employment contact, as their gross salary will have reduced.

We can make these calculations for you and provide advice on how to implement such an arrangement. If you would like to discuss this please book a online discussion.