As employees return to work, some employers may be looking to cut costs as they suffer the effects of Covid-19.
One of the ways they can achieve this is by using salary exchange (or salary sacrifice) on their company pension scheme.
How does a salary exchange work?
Using salary exchange as a means for employees to pay their pension contributions is a win-win situation of achieving savings for the company and increasing levels of investment for the employee.
In a nutshell, the employer saves on national insurance and employees save on the amount of income tax and national insurance they pay.
A salary exchange is when an employee gives up the right to part of the cash remuneration due under his / her contract of employment usually in return for an employer’s agreement to provide some sort of replacement non-cash benefit.
An employee may also sacrifice a one-off benefit such as a bonus or company car, for example and in return the employer could make, for example, additional pension contributions for the employee’s benefit.
What are the advantages to employers?
Some employers are not aware of the advantages and cost savings of having salary exchange on their pension scheme – it can save considerable amounts off their salary bill.
As well as many advantages, there are certain drawbacks to a salary sacrifice arrangement:
- no guarantee that the higher salary entitlement will be returned in future
- a reduction in earnings-related state benefits
- impact on tax credits
- impact on any other employer pension provision if this were to be based on the lower cash remuneration
- there will potentially be an impact on what the employee can then borrow in terms of a mortgage or loan if the lender uses the post sacrifice salary for income multiples.
The advantages and disadvantages of this arrangement need to be considered in light of the wider financial planning needs of the individual and employer.
For more information contact Becky Hammonds on 07969 269677 or email becky@willowfs.co.uk
