If auto enrolment is a problem is salary sacrifice part of the solution?

If auto enrolment is a problem is salary sacrifice part of the solution?

1. What is salary sacrifice?

Salary sacrifice arrangements involve employees giving up part of their future gross salary or bonus entitlement in return for a non-cash benefit such as an employer pension contribution or childcare vouchers. From an employee’s perspective, sacrificed amounts lead to lower National Insurance and income tax deductions and helps them to save more for retirement.

2. Why would employers want to introduce salary sacrifice?

An employer can make some substantial savings by introducing salary sacrifice. They will not be required to pay NICs on the amount of salary and/or bonus exchanged. Plus, the amount of contributions that the employer is required to pay under automatic enrolment is determined on post-sacrificed salary and not pre-sacrificed salary. Finally, corporation tax relief can be claimed on the whole contribution. In addition to these cost related advantages, salary sacrifice arrangements can also bolster the employer’s image. Employers can use these agreements to provide valuable benefits packages to employees, which can encourage recruitment and retention.

3. What are the practical issues?

Contracts of employment need to be varied to reflect the agreed sacrifice. Time will be a factor; most arrangements need 6-12 months to calculate the cost implications and suitability for the workforce (employees who earn less than the lower earnings limit may find salary sacrifice impacts on State benefits and other benefits offered). Bear in mind that employers who make significant changes to terms and conditions of employment, including those which affect the pay of employees, may need to consider whether a 30 or 45 day consultation period might be required, if the change affects 20 or more employees.

4. What are the benefits of auto enrolment for employers?

Salary sacrifice is one of the few legal ways employers can provide benefits and save costs at the same time. They key practical issues around salary sacrifice mirror the issues around auto enrolment so dealing with it as part of auto enrolment should be seamless and potentially of benefit for many businesses.