Employees who join their employer’s pensions salary sacrifice scheme stop paying pension contributions and instead sacrifice part of their gross salary in return for higher employer pension contributions. This means that both employers’ and employees’ National Insurance Contributions (NICs) are saved whilst maintaining the same amount of pensions savings. This is because employers’ pension contributions are exempt benefits and they are not caught by the salary sacrifice rules.

The employers’ NICs saving is the main benefit of such schemes. The employer can choose to use all or none of the saving to invest in the employees’ pensions.

Before implementing a pensions salary sacrifice scheme, employers should consider the drawbacks of operating one, such as the extra administration and the risks of failing to comply with National Minimum Wage legislation. Thought should also be given to the interaction with Auto Enrolment obligations.

Communication with employees is also essential because their reduced gross salary may affect their entitlement to earnings-based payments such as bonuses, as well as statutory payments such as sick pay.

For a salary sacrifice to be considered ‘successful’ by HMRC it must meet certain requirements, including amending the employees’ contracts. If you are interested in implementing such a scheme, please speak to us.