In the current economic climate, maximising tax saving opportunities within a pension is becoming more and more important.
What is Salary Exchange?
Salary Exchange enables the member and/or employer to retain the National Insurance (NI) that would otherwise be payable on any personal contributions to a pension arrangement.
Personal contributions to any pension scheme are normally eligible for full income tax relief, however they are liable for both employer’s and employee’s National Insurance. If personal contributions are switched to employer contributions and the member’s salary is reduced by an equivalent amount, then both the employer and employee save the NI on that amount.
This NI saving can be used to increase the contribution, to increase the member’s take home pay and as a cost-saving for the employer; or any combination of these.
For example – a member wishes to contribute £100 pm as a personal contribution. If this is done by way of a reduction in salary, there is a personal NI saving of £12 and an employer’s NI saving of £13.80. This can all be added to the pension contribution and paid as an employer’s contribution, with no increase in cost to either party. (This assumes that the member’s contribution falls below the upper NI threshold).
In addition, full tax-relief is obtained immediately under this arrangement – as contributions are paid by the employer and not taken as salary, they are not liable for personal income tax.
How can Wren Sterling help?
We have a great deal of experience and expertise in the implementation of all Tax and NIC efficient schemes, known as ‘salary sacrifice’ or ‘salary exchange’ schemes, covering eleven different areas including, bus to work, green travel and parking in addition to Pension Contributions and Childcare schemes.
Whilst offering National Insurance savings for both the scheme member and the Company it is vitally important that you seek specialist advice when implementing any Salary Exchange scheme, as should the scheme be deemed ineffective by HMRC it would result in the Company and the members having to repay any NI savings made.
Historically, salary sacrifice arrangements were complex to arrange. This is no longer the case and almost all pension schemes that we advise on now operate on this basis.
If salary exchange is introduced, employers must keep an ongoing record of members’ original “notional” salaries and base future pay increases and other benefits (such as any death in service scheme) on that higher amount. Tax and NI will however be calculated on the reduced salary figures following the salary sacrifice. Wren Sterling can calculate the revised salaries and contributions for you once we know what level of personal contributions each member wishes to pay.
Some things to bear in mind
Before going ahead with Salary Exchange the member needs to be sure Salary Exchange is right for them. Reducing their salary involves making a change to their contract of employment and it is important that they are aware of the implications of this. For example:
The member's ability to borrow could be reduced following the implementation of a Salary Exchange arrangement. This could effect the levels of mortgages or personal loans available.
Their entitlement to other salary related benefits may also be affected. These could include bonuses, overtime pay and redundancy payments.
The reduction in salary can effect the entitlement to some state benefits. Entitlement to benefits such as Incapacity Benefit, Jobseekers Allowance and the Basic State Pension depend on an individual's National Insurance contribution record. In most cases, this means entitlement probably won’t be affected as long as the reduction stays above the Lower Earnings Limit (LEL).
Entitlement to other benefits such as State Second Pension, Statutory Maternity or Paternity Pay, Statutory Adoption Pay, Statutory Sick Pay, Means-tested Benefits or Tax Credits are earnings related. An agreement to salary exchange could have an impact on these.
A member cannot participate in Salary Exchange if it results in their salary falling below the National Minimum Wage.
As you will see this is not always straight forward and communication with the members is imperative. Wren Sterling has many years' experience in this area and would be happy to go through this with you and your staff.