by Ian Jenkins, Nockolds Wealth
firstname.lastname@example.org | 01279 712523
With minimum contribution levels in workplace pension schemes about to increase, is now the right time to consider whether your company is operating in the most efficient manner. In my experience, many schemes have now realized the benefits of paying contributions via Salary Exchange.
Why use Salary Exchange?
Salary Exchange offers a fantastic opportunity to create annual savings for employers whilst adding a little extra to employees’ take home pay.
How Does it Work?
A Salary Exchange occurs when an individual agrees to give up the right to a proportion of their pay through a change in the terms and conditions of their employment. This is simply arranged by the signing of a letter confirming their intention to make this change. In return, their employer provides them with an additional employee benefit (i.e. a pension contribution of equal value).
In giving up an amount of pay, prior to receipt, an individual benefits from a reduction in both their National Insurance Contributions (NIC) deductions, and similarly the employer also sees their NIC fall. The tax position is neutral because although tax is deducted from their salary, basic rate tax relief is added to pension contributions as they are paid (higher rate tax is re-claimed via self-assessment tax returns).
What are the Advantages?
With the reduction in Income Tax and NICs, it means that an employee benefits from either a greater pension investment for the same personal cost, or a reduced cost for the same pension investment. This cost advantage is increased further if the employer rebates part or all of the NICs which they save.
What Else Should be Considered?
Salaries cannot be reduced to below National Minimum Wage levels as a result of using Salary Exchange.
Entitlement to state benefits, such as Statutory Maternity Pay and State Pension, may be affected if the salary is reduced below the level at which NICs are payable.
In certain Trust based pension schemes, no short service refunds will be paid for scheme leavers, as all contributions are treated as being from the ‘employer’
Salary Exchange may be useful in allowing some individuals to get back some of their Personal Tax Allowance which they start to lose once they earn more than £100,000 per annum.
It may also be useful in allowing earnings to be reduced to a level that allows a parent to increase their entitlement to Child Benefit (which reduces when one parent earns over £50,000 per annum and disappears completely if they earn more than £60,000).
By reducing Gross Pay, other employee benefits may be affected, for example, it may mean that Death in Service or Income Protection benefits are based on lower earnings than they would otherwise have been. There is however, a simple solution to this. The wording on the policy documents is simply changed to state that cover is based on pre-exchange levels of salary.
Historically, a perceived negative of Salary Exchange was that lower earnings levels may reduce someone’s ability to borrow multiples of salary for mortgage purposes. However, when assessing lending criteria, assessments are now made on disposable income levels (which are actually slightly increased by using Salary Exchange).
So is now the right time to consider whether you might help meet your pension costs by enhancing the efficiency of the way in which they are paid?
For a free initial assessment, please contact Ian Jenkins of Nockolds Wealth on 01279 750678.