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   Salary costs & benefits
  Salary Costs & Benefits
  Employer salary costs   Scheme benefits
  Lower scheme costs   Other changes
  Change existing scheme  
    

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Employer salary costs
Although for a Salary Sacrifice Scheme the employer contributes to the employees pension, the reduced employee salary and employers NI costs mean that there is no difference in the payroll cost to the employer as follows.

No cost change for employer
  Current Scheme (£) Salary Sacrifice (£)
  Salary
24,000 22,209
  Add: NI costs
3,072 2,843
  Add: Pension
0 2,020
  Total costs
27,072 27,072
Example - Assumes for the Current Scheme that the employer does not make a contribution to the employees pension.

Although the above scheme is cost neutral for the employer, an employer may wish to establish a scheme where the contribution to pensions is 10% of payroll.


Lower scheme costs
A Salary Sacrifice Scheme offers a number of benefits to the employer, in particular up to a 68% reduction in costs for operating such a scheme where the contribution to this pension scheme is 10% of payroll.

The following table shows an example of the employers payroll costs and actual or intended percentage contribution to pensions.

Payroll of employer
  Number of employees
30
  Average salary
£24,000
  Total payroll costs
£720,000
  Intended pension contribution
10.00%
Example - Assumes the employer does not pay into a Current Scheme although the employee may do or have a separate pension.

Typically a new Net Pay Scheme such as group personal or stakeholder pension would require both the employee and employer to contribute to the employees pension plan. Therefore should for example 30 employees contribute say 5% of their net pay or £36,000 net per annum the employer may also contribute £36,000 gross per annum or 5%.

For a Salary Sacrifice Scheme the employer would contribute on a 2 for 1 basis, this means that whatever the net cost to the employee, double is invested by the employer to the pension or £72,000 gross per annum and no contribution is made by the employee as seen in the following table.

Cost of 10% pension to employer
  Current Scheme Salary Sacrifice
  Employer Pensions (£)
36,000 72,000
  Less: Salary sacrifice (£)
0 53,730
  Less: NI savings (£)
0 6,870
  Pension contribution (£)
36,000 11,400
  Pension cost of payroll
5.00% 1.58%
Example - Assumes that the total employee contribution for the Current Scheme is £36,000 and £0 for Salary Sacrifice scheme.

For the Net Pay Scheme the cost to the employer is 5% of payroll. However, for the Salary Sacrifice Scheme the employer invests in the employee's pension the savings made from the salary sacrifice and employers NI, £53,730 pa and £6,870 pa respectively. As a result the pension contribution is only £11,400 pa or a cost of only 1.58% of payroll.

The cost saving for the employer if every employee became a member is 3.42% of payroll, that's £24,600 per annum or 68% less than a Net Pay Scheme. This represents a significant saving on an existing scheme or a new scheme to be established where the contribution is 10% of payroll. Furthermore, as not every employee will join the Salary Sacrifice Scheme, the cost of these schemes is typically less than 1% of payroll.


Scheme benefits
Where there is no pension, the employer can introduce a Salary Sacrifice Scheme either as a group personal or stakeholder pension based on a 10% employer contribution.

For the employee:

Compared to the employee investing 5% net to a pension or £1,538 pa gross, this would mean an extra 56% being invested by the employer or £2,400 pa;
   
The 10% can be paid to the employee's own pension as part of a low charging group personal or stakeholder;
   
The scheme is easy for the employees to understand;
   
It rewards employees for their efforts;
   
It offers valuable and enhanced retirement benefits to the employee whereas before there may be none.
   
At retirement the employee can use this pension fund to purchase an annuity, before making a decision regarding this pension income, learn more about annuities, compare annuity rates and secure a personalised annuity quote offering guaranteed rates.

For the employer:

A Net Pay Scheme costing 5% of payroll can be reduced by a Salary Sacrifice Scheme to a maximum of 1.58% or a 68% cost saving;
   
As not every employee will join, the cost of the Salary Sacrifice Scheme is usually less than 1% of payroll;
   
The scheme assists in retaining quality employees, especially where other employers do not offer a Salary Sacrifice Scheme;
   
The scheme can help in recruiting new employees, for example where other employers do not offer a Salary Sacrifice Scheme;
   
If the existing pension is an occupational money purchase scheme it takes away the responsibilities and concerns of being a trustee as this is not required by group personal or stakeholder pension that would be established by a Salary Sacrifice Scheme;
   
It is easy to implement and administer.


Change existing scheme


A salary Sacrifice Scheme will use either a group personal or stakeholder pension as a pensions vehicle. The scheme can be set-up for all employees or only for those that opt for salary sacrifice. Any fund built-up within Current Arrangements can be left in those funds or transferred if it is in the employees interest.

In the majority of cases the current Net Pay Schemes will be either an occupational money purchase, group personal or stakeholder pension.

The full benefits of changing existing arrangements could be as significant as establishing a new scheme for both employees and employer and the actual benefits will depend on the existing contributions to the pension.


Other changes

Changing an employees salary may have implications on other aspects of their finances that they need to be award of as follows:

Mortgage multiples are based of salary so the total amount that can be borrowed could decrease. However, this would not be the case where the Salary Sacrifice was deduced from the gross amount on the pay slip;
   
For S2P there would be a reduction in this amount as the gross salary has been reduced. However, as S2P is averaged out over lifetime earnings the reduction would be small compared to the gain in pension from a Salary Sacrifice Scheme;
   
The maximum contribution to pensions is based on gross salary multiplied by a percentage, up to 40%. Therefore in theory a reduction in gross salary would reduce the maximum possible payment to a pension. However, in practice very few employees do pay the maximum;
   
For maternity payments the first 6 weeks are paid at 90% of average earnings but the last 20 weeks are paid as a flat rate of £100 so salary sacrifice would have a limited detrimental impact;
   
In the case of redundancy, salary sacrifice will only have an effect where earnings are less than £250 per week as statutory redundancy is linked up to this amount of salary;
   
Where the employer offers life assurance as a multiple of salary a reduction in salary would reduce the total amount of life cover.
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