Salary sacrifice is a way to make your pension scheme even more tax efficient and one of the 12 areas identified by our DC MOT for ensuring DC pensions and associated benefits are in good shape.

In this video, we take a look at salary sacrifice – a way to make your pension scheme even more tax efficient, one of the 12 areas identified by our DC MOT that employers should consider to ensure their DC pension and associated benefits are in good shape.

  • Salary sacrifice - Podcast transcript

    In this edition of DC Spotlight, we take a look at how you could make your pension scheme even more tax efficient for you and your people – via Salary Exchange. Yet despite these savings being available, Mercer’s DC MOT research has found that over 20% of employers are yet to implement a pension salary exchange arrangement.

     

    Ordinarily, all employee pension contributions are subject to both employee and employer National Insurance Contributions. But, under a salary exchange arrangement, the employee exchanges part of their salary for a pension contribution made by the employer of the same amount. The salary given up does not attract National Insurance contributions, generating significant savings for both employees and the employer!

     

    Making contributions via salary exchange saves an employee a national insurance charge of up to 13.25% on their pension contribution and the employer saves 15.05%. Put another way, by not using salary exchange, you and your people are incurring unnecessary tax bills. For example, an employee with a Pensionable Salary of £40,000, paying an employee contribution of 6% into their pension scheme would save £318 per year and the employer would save £361 per year. For 1,000 employees this would be a saving of over £360,000 per year for the employer!

     

    Salary exchange needs to be carefully planned – getting it wrong can impact broader benefits and/or breach legislation which can lead to fines and reputational harm. But, with careful planning and support from Mercer, change can be made to introduce a salary exchange arrangement for all staff - making a considerable saving for you and your people.

     

    It can also bring other benefits such as reducing employees’ taxable earnings beneath levels which mean they may become entitled to means tested benefits that they were not before such as Child benefit and government funded childcare. And if you operate a Group Personal Pension, all of your staff will benefit from immediate tax relief, regardless of their earnings. Salary exchange can be a real financial win-win for employers and employees.

     

    To find out more, contact your usual Mercer DC Consultant. We look forward to speaking with you!

     

       

And if you don’t already work with Mercer on DC pensions, get in touch at DCMOT@Mercer.com or contact us here. We’d be delighted to help you benchmark your scheme against other UK employers for free – to help you identify ways you can save money, reduce risk and improve the outcomes for you and your people.


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    RITE is a point in time evaluation and provides no guarantee of current or future compliance with prevailing regulations.