Salary sacrifice: A reminder of the benefits for clients 'No real downside to salary sacrifice if done correctly'

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Salary sacrifice: A reminder of the benefits for clients

Claire Trott

Claire Trott runs through the benefits of salary sacrifice, which she says, if done correctly is a no-brainer...

With the cost of living crisis in full swing and clients understandably eager to limit unnecessary spending, pension planning is likely to be far down the agenda for

many.

As advisers, it is important to ensure that, where possible, clients do not sacrifice their future savings completely and are aware of the different tips and tricks available to them to maximise the money going into their pension, despite the current economic turmoil.

One particularly attractive tip worth highlighting to clients is salary sacrifice. It has become common practice for employees to sacrifice part of their salary and/or bonus in return for their employer paying the amount sacrificed as an employer pension contribution on their behalf.

This can be far more attractive than the employee making a direct pension contribution, particularly if the employer is prepared to increase their pension contribution by part or all of their National Insurance (NI) contribution savings.

Attractions of salary sacrifice

Contributions paid out of an employee's after-tax pay are less attractive as the employee (and their employer) will have paid NI contributions on the gross income received. This is not the case where the value of the contribution is sacrificed in exchange for their employer paying the equivalent as an employer contribution.

The employee will save the top part of their NI payment, which currently is 3.25%, or 13.25% depending on earnings. The employee pays the higher rate on monthly earnings between (currently) £1,048 and £4,189 and the lower rate over this on the rest of their earnings. So, this can be a significant saving and more for the lower paid than those earning over £4,189 per month. With these rates set to drop to 12% and 2% again earlier this week (6 November), clients may feel like salary sacrifice is no longer worth it. Despite this, they can only benefit from the savings they are making, they won't be worse off.

In addition to personal savings, employers often pass on some or all of their savings. Employers currently pay 15.05% on all earnings paid above £758 per month. This doesn't mean that they will pass on this whole amount. Often, they give a set amount such as 10% or an amount based on their savings, such as 90% of their saving retaining the rest. The employer rate is also due to drop on 6 November, back to 13.8%, which may impact on the amounts passed on to members.

Whatever the rate and whatever is passed on from an employer, it is still better value than paying directly and, as every little helps, it makes sense for clients to take advantage of this option if available.

(Note that, whilst NI for company directors is slightly different, for example, they will generally pay a blended rate of NI taking into account the changes in rates throughout the tax year, the principles around making savings apply equally to directors and other employees.)

Additional benefits

If your client has an income of between £100,000 and £125,140, salary sacrifice planning can also be used to reclaim the personal allowance in addition to the income tax and NI savings.

There will be no effective delay in receiving higher or additional rate relief because the salary is reduced before payment. By contrast, if the contribution is paid directly by your client to a personal pension scheme, higher or additional rate relief will need to be claimed via their self-assessment tax return. Of course, if the contribution can be paid to an occupational scheme of which your client is a member, and which deducts member contributions using 'net pay', full tax relief should be available immediately.

All the usual benefits of pension contributions still apply, such as reducing income for tests such as the high-income child benefit charge. However, there are limits. The salary should not be reduced below minimum wage and the agreement must be in place before the employee actually becomes entitled to the payment. This means it isn't possible to back-date salary sacrifice payments.

If available, there isn't any real downside to salary sacrifice if done correctly. It is important to ensure that when dealing with the paperwork it is carefully constructed to ensure it qualifies for salary sacrifice but doesn't impact any of your clients' other benefits from the employer, such as death in service, bonus calculations and pay rises. Ideally, these should always refer to the pre-sacrifice salary. However, calculations such as mortgage multiples and other things that just consider gross salary could be impacted, because the payslip will only show the reduced salary.

It is important that your client considers this before entering the arrangement.

Claire Trott is divisional director, retirement and holistic planning at St James's Place