Salary sacrifice – time is running out to save money and enhance employees benefits

The budget last week, has started a very important countdown which if ignored, could cost business owners saving significant amounts of money.

Last week, Rachel Reeves announced that as of April 2029, salary sacrifice will be limited to a maximum sacrifice of £2000 per employee. This announcement has had led to employers and employees asking some, if not all, of the following questions?

1. What is salary sacrifice and why haven’t I heard of it before?
2. If they are taking it away, then it must be good?
3. What is the point if they are taking it away anyway?
4. Why are they capping pension contributions to only £2000 going forward?

So here is an easy guide to the above questions:

What is salary sacrifice and why haven’t I heard of it before?

Salary sacrifice means that an employee reduces their gross salary, in exchange for the employer paying the whole of their pension contribution. This has the effect of reducing both the amount that employee and employer pays in National Insurance and tax. The saving can then be used in a variety of ways:

• The employee can keep it, increasing their take home pay above the net amount they used to receive from the higher gross salary.
• The employee can increase their pension contribution by the amount saved and still take home the same net pay as before the salary sacrifice.
• The employer can keep their national insurance saving which in return reduces their income costs.
• The employer can put the money in to the employees pension pot, increasing the monthly premium.

In other words, the employee can either take home more salary or increase their pensions, whereas the employer can increase the benefits that an employee gets or save money on their overheads.

If they are taking it away, then it must be good?

In essence, yes. This is a tried and tested way for both employers and employees to benefit by paying less tax.

The only downside for an employee is that the employees gross salary is lower which may impact the amount that they can borrow for a mortgage (which is based on salary). Conversely, it may help some employees reclaim some means tested benefits such as child benefit and personal allowance exemptions.

What is the point if they are taking it away anyway?

This will not come in to force until April 2029, which means that there is still three years to benefit from these savings. And even after this date, it will still have the same advantages as before up to a sacrifice of £2000.

Now that there is a deadline for this cap to be introduced, every month sees a potential loss of savings or added pension contribution.

Why are they capping pension contributions to only £2000 going forward?

It is only the amount that can benefit from salary sacrifice that is capped at £2000. You can still pay in to a pension at the same levels as before, subject to the current allowed levels.

So how does a firm introduce salary sacrifice?

Salary sacrifice is a difficult concept to explain to employees and benefits from being presented in an easy to understand way. It also requires a consultation period with staff if it is to be introduced, as ultimately it is a change of employment contract. It is therefore recommended that you talk to either (or both) your accountant and financial adviser to talk you through the required legal steps.

The above only touches on the very basics around the changes coming in April 2029. If you would like a no obligation discussion around how both employers and employees can save money (or enhance benefits), then please get in touch.

If you have any questions, please get in touch,
Adam
0141 345 2015