How salary sacrifice can save thousands in workplace pension costs

By Partner Content on Small Business UK - Advice and Ideas for UK Small Businesses and SMEs

Small UK businesses are being impacted by supply chain issues, rising inflation and the energy crisis. Many fear permanent closure, which is why they’re trying to cut costs wherever possible.

This is where your employee benefits package plays an important role. A workplace pension scheme via salary sacrifice can help businesses save some money. Although you have to pay contributions to staff pensions, there are great savings too.

When correctly set up and used well, a workplace pension can be valuable. But setting one up might be daunting because of the complexities of group pensions. There’s a lot to consider and strict rules to abide by.

Pension schemes are mandatory for employers. Many pick the Government-run provider, Nest. However, this doesn’t always mean it’s the right decision for your business. You might miss out on what other pension providers offer and the benefits of salary sacrifice.

We’re going to explore how your small business can use salary sacrifice and save money through it.

What is a salary sacrifice workplace pension?

Salary sacrifice is an alternative to a net pay setup that offers you more benefits. A contractual agreement is made between the employer and the employee to sacrifice part of their monthly salary. This contributes to their pension pot alongside your contributions.

As the salary deduction occurs pre-tax, salary sacrifice schemes are an efficient way to save for retirement.

What savings can be made?

There are savings for employees and employers through a salary sacrifice workplace pension. These enable companies to get the most out of their pension scheme.

Employee

When an employee agrees to sacrifice some of their monthly wage to their pension, they get tax relief. As salary sacrifice reduces their monthly income, they pay less National Insurance (NI).

Staff go home on payday with a higher wage through a salary sacrifice pension scheme. This is because their remaining taxable income after salary sacrifice is lower. So, they pay less NI. In fact, they can save National Insurance Contributions (NIC) of 13.25 per cent of the amount sacrificed on earnings above the primary threshold (£12,570 for tax year 2022/23).

For an employee earning £25,000 per annum and contributing 5 per cent to their pension, they can save around £10 a month.

But a recent Workplace Pension Survey by employee benefits consultancy Drewberry, found that 48 per cent of employees don’t understand salary sacrifice or the tax relief. If your staff don’t understand what salary sacrifice is, they may miss out on the above savings.

Employer

A salary sacrifice workplace pension isn’t only valuable to your employees. Employers have a duty to pay NIC on their worker’s salaries every month. If they opt for salary sacrifice, the company also benefits from their employee’s reduced pay. As their taxable income is lower, employers can save up to 15.05 per cent in NIC.

Here’s an example of potential cost savings. In one year, you can save £141.17 per employee in NIC. This estimate is based on each employee earning £25,000 a year and contributing 5 per cent into their pension. The more employees enrolled, the higher the savings. If you have 30 employees that you pay pension contributions to, salary sacrifice could save your business up to £4,000 a year.

Now, as an employer, you can choose to keep these NI savings for the business, thus helping you to save money. Or you can pass the savings to your employees to boost their pension pot, which also helps them to save more.

Plus, pension contributions are an allowable tax deduction if they pass the ‘wholly and exclusively’ test. Putting these through as an expense means the amount isn’t subject to corporation tax.

The cost of living is having a significant impact on employers. Not only are they trying to reduce business costs, but they’re also trying to think of ways to help their employees manage the rising costs. A salary sacrifice pension scheme is mutually beneficial, as employers can save and so can employees. Taking advantage of salary sacrifice saves money, and even boosts productivity and staff morale. This can also have a positive impact on a business, as higher pension contributions are one of the most sought-after benefits.

In order to get the most out of it as a benefit though, employers need to make sure they communicate what they offer — 41 per cent of staff were unaware of their employer’s monthly pension contributions.

When making any financial decision for your business, it’s best to speak to an expert first. Drewberry provides corporate pension advice to businesses of all sizes and can help ensure the process of adjusting your workplace pension runs smoothly.

Read more

How to choose a workplace pension provider

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