Salary Sacrifice – Old dog, new trick?

Salary sacrifice has been around for a long time now. And apart from a loss in confidence after the removal of the Home Computer Initiative scheme in 2006, it appears to be becoming more popular.

There are some very good reasons for this. The main one is that the employer can make National Insurance Contribution (NIC) savings on the amounts that employees sacrifice.

There is possibly now an even better reason to consider salary sacrifice – the proposed introduction of Personal Accounts (PAs) in 2012.

It’s probably safe to say that pension schemes set up on a salary sacrifice basis will be treated as ‘qualifying schemes’ so employers won’t have to enrol their employees into PAs. Why? Because there are some very large UK employers out there already offering salary sacrifice. And, the intention is that PAs will not negatively impact on current pension provision.

Assuming that salary sacrifice will comply with whatever we’ll have in 2012, and there’s little reason to suppose that it won’t, why would employers want to consider introducing it now?

It has been recognised that there will be a cost to employers if they decide to use the PA route. But even those employers who want to offer an alternative scheme will at the very least have to communicate this to members – which costs money. The tax and NIC savings generated by salary sacrifice can be used to offset these costs – an option not currently proposed under PAs.

In the face of the publicity that will surround the introduction of PAs, employers who want to continue to offer their established scheme may need or want to set out to employees why their scheme is better. It’s well publicised that the proposed contribution rates to PAs will be 3% employer, 4% employee and 1% in tax relief, a total of 8% (albeit on an earnings band, rather than full salary). Using salary sacrifice without reducing employees’ take home pay and reinvesting all the employer NIC savings could result in more than 8% going into the plan.

The NIC savings that are made by an employer can be used in other ways. For example, they can be used to set up and administer flexible benefits packages which can give an employer the edge in the recruitment market for example. And the better the benefits package, the more likely employees will think twice about leaving the company.

But there are potential pitfalls to salary sacrifice too. Her Majesty’s Revenue and Customs may look more closely at cases where the employer simply keeps the money that they save as a result of the NIC savings. After all, in order to be deemed effective by HMRC salary sacrifice should reduce salary to provide a noncash benefit. There are issues for employees too. A reduction in salary could effect borrowing power or reduce certain state benefits. Employers can use ‘shadow pay’ (the amount before sacrifice) to mitigate some of these issues and in general the effect on state benefits should be minimal for most, as long as the salary is above the Lower Earnings Limit for NICs – £4,680 for 2008/2009.

Personal Accounts will affect every employer in the UK. It’s impossible to tell at this point exactly what the impact will be or even how many employers know what it’s all about.

Perhaps salary sacrifice, which can offer savings to employers now, can be a door opener to talk in a constructive way about Personal Accounts and allow forward planning to minimise any impact. It won’t be right for all employers, but for those that want to continue to provide a decent work based pension scheme, it could just make the difference.