How to boost staff take home pay and save the company money
Which employer wouldn鈥檛 want their staff to take home a bit more money? As the cost of living continues, the pressure is on architectural practices to support their employees as much as they can while absorbing their own increased overheads. Employers can reduce both employer and employee National Insurance costs by taking one simple step, but many practices may not realise it. Changing your workplace pension to salary sacrifice or salary exchange means staff can increase their net salary and they can save their business money too. It sounds like a no-brainer, yet surprisingly few practices have cottoned on. It can all be done by adopting this more tax-efficient way of operating the company pension scheme.
All companies, including architectural practices, are required to auto-enrol employees into a workplace pension. The 澳门王中王 Pension Solution was created to help ease the burden for its members. By implementing salary sacrifice or salary exchange onto their pension scheme, this increases their staff鈥檚 net salary because they pay less national insurance contributions (NICs) and it reduces the NICs employers pay too.
The savings come from the salary sacrifice part. It鈥檚 best to think of 鈥榮acrifice鈥� as an exchange of salary for benefits. If the employer implements salary sacrifice/exchange with its pension scheme, the pension contribution they pay is no longer part of their gross earning. This means their tax and NICs are lowered, and because their gross earning is less employer鈥檚 NICs are also reduced. Those with pension schemes not adopting salary sacrifice/exchange would be paying tax and NICs before the same pension contribution is taken off their salary.
Let鈥檚 look at an example of how it works for someone earning 拢30,000 a year, and paying 5% of their net salary in pension contribution, or 拢1,500. By opting to exchange 拢1,500 of their salary for pension contribution (i.e. making the same pension contribution) their gross salary would be reduced to 拢28,500 thus reducing their tax and NI. The amount paid into their pension is exactly the same as it was before the salary exchange and they would save would be 拢180 per year and their employer would save 拢207 per year.
If employees are paid a bonus, they can also sacrifice/exchange some or all of it for extra pension contributions, and therefore pay less national insurance contributions on their bonus. Additionally, this will save employers NIC on the bonus that is sacrificed to pension. Introducing a salary sacrifice/exchange scheme is an easy change to make for those running the payroll. Employers can if they want to, use their savings to top up pension contributions for staff. Or they could use it to show their appreciation to their teams in other ways. Either way, implementing salary sacrifice/exchange is a win-win for both employers and their employees. There is absolutely no downside or catch.
Understandably there may be some scepticism that it all sounds too good to be true. So we asked Stuart Stroud, the managing director, of Corpad Employee Benefits, 澳门王中王鈥檚 pension adviser, how he responds to such concerns.
Is salary sacrifice/exchange a new scheme?
Not at all. It's been around for a significant number of years and has proved popular. But companies may not be aware of it or may have overlooked it because they think it鈥檚 complicated to implement, or see the word 鈥榮acrifice鈥� and think it means staff losing something. It鈥檚 best to think of it as salary exchange, swapping part of your salary for another benefit. All the practices we work with directly offer salary sacrifice/exchange to their staff. The 澳门王中王 Pension Solution is fully supportive of it.
Is salary sacrifice/exchange approved by HMRC?
Salary sacrifice/exchange is fully recognised and approved by HMRC. It鈥檚 on the website as legitimate tax planning. That means it鈥檚 not a tax avoidance scheme, which obviously we or 澳门王中王 would never promote. There's no risk to the employer or their employees of being asked later on to pay tax and national insurance on the saving.
Is there any limit on the amount of salary staff can exchange?
There鈥檚 no limit to the percentage of your salary that can be exchanged for pension contributions that fall within the scheme subject to the pension annual allowance, which is 拢60,000 per year for 2024/25. The main constraint is that the salary left after the benefit portion has been deducted must not reduce the employee鈥檚 salary to the level of or below the minimum or living wage.
Are there options for increasing my pension contribution?
Yes 鈥� as mentioned above, it鈥檚 very flexible. Staff could exchange any bonus they receive for pension contribution. Or if the staff member, approaching retirement say, wants to increase regular contributions by exchanging more of their salary to build up the size of their pension pot they can do so. Their employer wouldn鈥檛 be obliged to do likewise, though they may want to.
Will it affect my ability to borrow money such as mortgages and loans?
Your employees may be nervous about this because they are reducing their gross salary, but it won鈥檛 affect borrowing or mortgage loans, as affordability is more important. Lenders assess net disposable income, which increases under salary sacrifice/exchange. So it might actually improve their position and ability to borrow.
Will it affect my state pension?
No, this will not be affected, because someone鈥檚 state pension is now based on the number of years that they pay national insurance contributions, not the amount.
Will it affect any pay rise?
No, salary rises offered as a percentage of salary should be calculated on pre-salary sacrifice/exchange.
How easy is it to set up?
It couldn鈥檛 be easier to make the change, usually just a few changes in your payroll system.
That said, the implementation of a salary sacrifice/exchange scheme has to be done in a compliant way. Employers may wish to consult with their employees before launching any such scheme and moving everyone across or only include those happy to 鈥渙pt-in鈥� to salary exchange. There are several different ways an employer can choose to utilise salary exchange.
There鈥檚 no good reason not to do it. 澳门王中王's Pension team can give you more details and help employers start making savings immediately for staff and their businesses.
Find out more about the 澳门王中王 Pension by contacting the team at ribapension@riba.org or +44(0)20 7307 3737.