The corporate agenda

Salary sacrifice schemes are becoming ever more popular among employers striving to cut benefits costs in the current recession. While this popularity received a further boost with the Pre-Budget announcement of a 0.5 per cent increase in employers\' and employees\' NI from 2011, companies are increasingly taking the lion\'s share of the savings for themselves.

For those uninitiated in the minutiae of this particular tax break, salary sacrifice is a clever way for employers and employees to reduce the NI or income tax due on cash salary by going for benefits instead. So the employee gives up a portion of their salary and authorises the employer to buy benefits (such as pension contributions or a variety of other benefits which are tax and/or NI free if paid for by the employer) on their behalf.

The Employee Benefits/Axa Pensions Research 2008 found well over half of large organisations (those with more than 1,000 staff) now offer employees the opportunity to make pension contributions via salary sacrifice. Given the potential savings for large employers it has become something of a no-brainer for most – savings of hundreds of thousands or even millions of pounds are far too tempting for most to resist.

For organisations with just a few hundred staff, it is a case of weighing up the savings versus the complexity and cost of setting up this type of scheme. There is no doubt that setting up salary sacrifice is a minefield of employment law, dealing with the local tax office, avoiding falling foul of minimum wage and impinging on various tax credits. This is not a place to tread without a friendly tax expert.

Even the recent changes to the rules around the provision of benefits during maternity leave are causing consternation as employers realise they have to continue to supply a benefit purchased via salary sacrifice even though there isn’t a salary from which to deduct the cost.

However, as more finance directors get to grips with the money that can be saved by using salary sacrifice, so we expect more HR and benefits managers to be under pressure to choose this route. But a worrying trend for HR and benefits managers is that these savings are now frequently being taken straight back into the business, and not reinvested back into benefits or other HR initiatives, which until a year or so ago was common.

Debi O’Donovan is editorial director of Employee Benefits magazineThe ability for employees to enter into a salary sacrifice agreement with their employer to fund pension contributions has been a well established practice for over 20 years and is fully recognised by HMRC.

The clear advantage to the employee of using this process to fund pension contributions is the NI savings that are generated. This effectively means for a £100 net cost to a basic rate tax payer £144.93 is invested into the pension scheme as opposed to £125.00 under the traditional net pay method of funding contributions.

When employees enter into a salary sacrifice agreement, which is a legally binding change in the employees’ contract of employment (and must be clearly documented as such), their salary is reduced by the amount of the contribution they wish to make. By agreeing to reduce their salary, the employer will also save NI contributions (currently at the rate of 12.8 per cent of relevant band earnings) and it is here where significant extra investments can be made by the employer for their employees at no extra cost.

This is achieved by the employer simply paying their NI savings as a bonus contribution into the members’ pension fund. This increases the £144.93 detailed above to £163.48, a 31 per cent increase in the value of the contribution invested when compared to the traditional net pay method.

It is also key that the mechanics of salary sacrifice are explained to employees, either through group presentations or individual consultations (or both) so that employees understand fully all of the various issues around salary sacrifice arrangements, in particular their effect on certain State and statutory employer benefits.

Most employers do re-invest their NI savings as bonus pension contributions for their employees. We have also seen employers looking to use some of the employer NI savings generated to fund other benefits as opposed to investing all of the savings as bonus pension contributions.

As employers look to get real value for their benefit spend, whilst also meeting the needs of their employees by using a range of flexible benefits, it could be expected that this approach of using salary sacrifice NI savings will begin to become the norm rather than the exception.

Jarrod Parker is EB director at Alexander Forbes Financial Services