Salary sacrifice works – but don’t rush it
Oval’s Nick Allen is a fan but anecdotal evidence reveals the potential traps

Did you know?
By 2008, 48% of UK employers had a salary sacrifice scheme in place – compared to 29% in 20071.

Salary sacrifice schemes are becoming increasingly common – for instance, companies like British Airways, BAe Systems, LaFarge Group and Bombardier Transportation all have them in place. The big idea is simple: the employee foregoes a portion of salary that goes direct to their pension without affecting take home pay and at no extra cost to the employer. Compared to other sacrifice arrangements like childcare vouchers and cycle-to-work schemes, salary sacrifice on pension contributions delivers the highest savings in National Insurance (NI) for both the employer and employee. However, many companies haven’t fully appreciated the implications salary sacrifice has for both parties.

Some real-world experience

It may be anecdotal but it’s worth sharing, a recent conversation with a prospective client who had already implemented salary sacrifice raised some interesting side effects:

• Payroll: alterations will be needed so the correct NI deductions can be made and reported on-line.
• Maternity: the conversion of the employee pension contribution to an employer contribution under salary sacrifice means the employer maintains the employee contribution. This can affect how much NI an employer saves.
• State Second Pension: the amount payable for S2P (alongside the Basic State Pension) drops for people between £14,000 and £40,000. It’s worth investigating the full implications here.
• Backdating: you can’t backdate salary sacrifice as the salary must be sacrificed before it is accrued. Make sure you time the start of any salary sacrifice well in advance of its intended roll out date.
• Bonuses: make sure the bonus is sacrificed before it is accrued and becomes an entitlement – check your wording, especially for guaranteed bonuses!
• High earners: take care with high income Individuals as they could inadvertently create a tax charge under anti-forestalling legislation introduced under the last Government.
• The Taxman: remember, HMRC does not give prior approval to a salary sacrifice arrangement – it has to be designed and implemented before it’s submitted to HMRC for comment. If they reject the terms then the employer becomes liable for NI back to when the scheme launched - so follow a tried and tested method.

It’s clear from practical experience that certain individuals may not be suited to salary sacrifice and changes to employee rights in the future could also impact on the long term NI savings.

Our take on salary sacrifice is that it’s a positive step that makes pension saving more efficient for all involved. But like a pre-flight check, it’s really important to give everything a careful once-over before you start the engine. That’s why the right expertise and the right consulting partner will pay dividends down the line.

1 AXA/Employee Benefits Magazine, 2008

Like to find out more about how Oval can pressure test salary sacrifice for your business and your people?

Contact Nick Allen on 07584 171067or email at: nick.allen@theovalgroup.com.