Mitigating the cost of auto-enrolment

Salary Sacrifice arrangements may offset the spiralling cost of auto-enrolment, benefit both employers and workers.

“The vast majority of employers are now within auto-enrolment”, says Brearley & Co Tax Manager, Andrew Cowe.  “Unfortunately, contribution rates are increasing next year, and by 2019 employers will be paying treble what they do now, placing an increasing burden on businesses at what is already a difficult time”.

“However, you may agree with your employee(s) to have their pension payments made under a formal ‘Salary Sacrifice’ arrangement.  This is an agreement between employer and employee, changing the terms of the employment contract to reduce the employee’s cash pay.  The sacrifice of cash entitlement is made in return for a non-cash benefit, in this case, the pension contribution.  By the employer making the employee’s pension payment direct, both employer and employee save National Insurance (NIC)”.

“Pension contributions attract tax relief but not NIC relief. So if you pay someone £1,000, and they pay £100 into the company pension, they only pay tax on £900.  However, NIC is calculated on the whole £1,000 at a rate of 12%, costing the employee £120.  In addition, you must pay employer’s NIC of 13.8%, costing you £138”.

“In the above example, instead of paying cash wages of £1,000, you pay only £900 but compensate the employee for this by paying the £100 they were putting into their pension.  Employer contributions into a pension scheme are not liable to NICs.  Therefore, by this method, the employee still receives the same amount in the pension and pays the same tax, but both they and you as employer save on your respective NIC payments.  In this case, the employee suffers only £108 NIC, a saving of £12, and the employer £124.20 (saving £13.80)”.

“Obviously the actual savings in each case depend upon the size of the workforce and their salaries, but they are clearly significant in all but the smallest cases.  It is important that schemes are set up formally, with HMRC approval.  We are finding that the opportunity to save 13.8% on a significant portion of payroll costs, whilst increasing employees’ take home pay, is becoming increasingly attractive.  It really is a ‘win-win’ situation for employer and worker alike”.