Autumn Budget announcement has gradually cooled down in the media, but it marks just the beginning for employers to reassess their finance status. With the potential for increased costs and changes to the Employment Allowance, employers could face significant challenges. Specifically, they could be hit twice by a lower second threshold and rising employer national insurance (NI)rates, especially for those employing individuals over 21 years of age. Furthermore, employers with younger employees (under 21) may feel the financial strain  even more acutely.

A common concern among business leaders is how to lessen the impact of the additional employer NI costs stemming from the autumn budget announcements.One clear solution is the implementation of Salary Sacrifice arrangements, which have no requirements to value and report to HMRC. These include:  

- Payments into pension schemes

- Employer provided pensions advice

- Workplace nurseries

- Childcare vouchers and directly contracted employer provided childcare that started on or before 4 October 2018

- Bicycles and cycling safety equipment (including cycle to work)

In this article, we’ll focus on the commonly used scheme across various business sectors: salary sacrifice pension contributions.

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What is a Salary Sacrifice Pension Contribution Arrangement?

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A salary sacrifice pension scheme is a government-backed initiative where employees agree to forgo a portion of their cash salary in exchange for increased pension contributions. Importantly, these contributions are not subject to income tax or National Insurance levies, thereby reducing the employee’s taxable salary. Whilst this isn’t possible for employees earning at the National Minimum Wage, it’s encouraging to note that many employees (approximately95%, according to the Low Pay Commission) earn above the National Living Wage rate, thus presenting opportunities for potential savings.

Employers can offer salary sacrifice to all employees, provided it does not reduce their salary below the minimum wage. However, there are essential considerations for employers to keep in mind:

1. Compliance with Minimum Wage Regulations:Employers must ensure that the salary sacrifice does not breach national minimum wage laws. This requires additional administrative work to review employee pay in  each pay period to confirm that no payments fall below the minimum wage after deductions.

2. Administrative and legal costs: implementing a salary sacrifice scheme may incur extra administrative costs, including the need to arrange or revise employee contracts to reflect the changes accurately.

3. Employee Engagement: It is crucial to communicate the benefits of the salary sacrifice scheme clearly to employees.This transparency can enhance participation rates and help employees understand how the scheme can benefit their long-term financial security.

4. Adjustments for Opting Out: If an employee opts out of a salary sacrifice arrangement, employers will need to adjust their payroll to refund the national insurance contributions savings, as these savings apply only while the employee’s money remains in the pension.

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How to Prepare and Start Salary Sacrifice Pension schemes?

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Many employers may wonder how to start and implement salary sacrifice schemes into their workplace pension plans. The following considerations will help you:

1. Contact Payroll: Employers should get in touch with their payroll to see if they can facilitate salary sacrifice for their workplace pension scheme.

2. Employee Agreement: Employees will need to agree to the change in their contract or through an agreement letter.  Employers must obtain employees’ permission before enrolling them in a salary sacrifice scheme.  If employees do not agree, employers will need to continue taking their pension contributions in the usual manner.

3. Create a Salary Sacrifice Worker Group: Employers will need to create a salary sacrifice worker group in their Online Services account. Ensure this group is set up so that all contributions are paid by the employer and label the worker group accordingly (e.g., “Salary Sacrifice”). Note that a standard worker group will still be necessary for employees who do not agree to contribute using salary sacrifice.

4. Set Up Through Payroll: Once the employer has received employee permission and established the new worker group, they can setup the salary sacrifice scheme through their payroll. Before submitting any pension data, verify that your worker groups match your payroll.

The increase in employer national insurance contributions presents a significant challenge for businesses, particularly in light of the recent autumn budget announcements. However, the implementation of a salary sacrifice pension scheme offers a viable solution to mitigate these rising cost while simultaneously enhancing employee benefits. By strategically adopting this approach, employers can navigate the evolving financial landscape, ensuring both business sustainability and employee well-being in the process.As the budget discussions fade from the media, proactive financial strategies like salary sacrifice will be essential for employers to maintain their competitive edge.

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