Maximising savings through salary sacrifice

By Nathan Munt, Lucas Fettes Financial Planning.
Salary sacrifice remains an attractive option for businesses looking to pass on National Insurance savings to their employees.
Published in UK Director Magazines Summer 2024

Ensuring Business as Usual: Nathan Munt, Lucas Fettes Financial Planning

The Chancellor announced that National Insurance (NI) rates would be cut by 2% in this year’s Spring Budget. This is good news for employees, as their take home pay will increase. However, this was already possible through salary sacrifice via workplace pensions. While the rate cuts reduce the savings offered by salary sacrifice, it remains a great option for employers and employees alike.

What is salary sacrifice?

Salary sacrifice is the most efficient way for employees to save into a pension. It works by reducing part of a person’s salary in exchange for a higher pension contribution from the employer, meaning the employee pays less tax and NI. They can therefore keep more of their take-home pay while saving more into their workplace pension. As there is no tax relief to claim, higher-rate taxpayers can enjoy the tax benefits offered by pensions without needing to reclaim this via self-assessment.

Depending on employee participation, employers also save on NI contributions too. This saving can be reinvested into the business or diverted into employees’ pensions.

Considerations for employers

While salary sacrifice has clear benefits, it is important that employers take advice before introducing these arrangements.

You can choose to let employees ‘opt in’ to salary sacrifice, but this could lead to reduced take up. As an employer, the financial benefits of reduced employer NI are only granted if employees choose to take part in the scheme. To overcome this, salary sacrifice can be made the default option for workplace pension contributions. Passing on some of the employer NI saving into employees’ pensions can encourage further take up.

Salary sacrifice is not right for everyone, and some employees will not benefit from such arrangements – particularly those with low earnings – so you should review this in advance.

As a contractual change, salary sacrifice must be implemented correctly with an appropriate agreement/variation to employees’ terms and conditions.

Thought should be given to the rules and how you will manage salary sacrifice. This includes whether to include a salary cap, as you must consider the potential implications of having an employee absent from work for a long period of time, how to implement the change within payroll, and when to allow staff to vary their contributions in future once salary sacrifice is in place.

Next steps

Could salary sacrifice be a viable option for your business? If you would like to discuss the options available to you, get in touch.

Lucas Fettes Financial Planning® is a registered trading name of Lucas Fettes & Partners (Financial Services) Limited and is authorised and regulated by the Financial Conduct Authority.

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GET IN TOUCH

Nathan Munt is a Chartered Financial Planner at Lucas Fettes Financial Planning, a multi-award-winning chartered firm of independent financial planners.

T: 01603 706854
E: nathan.munt@lffp.co.uk
Or visit
www.lffinancialplanning.co.uk

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