Salary Sacrifice in GB FlexBens Pension Plans
Use
Within Flexible Benefits schemes generally, a salary sacrifice occurs when an employee agrees with their employer to forfeit part of their future pay in return for a benefit in kind. Such an arrangement typically means that the employer agrees to provide the employee with another form of non-cash benefit. This non-cash benefit may be offered through a Flexible Benefits plan. The “sacrifice” is achieved by varying the employee’s terms and conditions in respect of their remuneration.
The most common form of salary sacrifice involves the employee opting to sacrifice some of his or her salary. In return, the employer agrees to pay an equivalent percentage or fixed amount into the employee’s pension scheme on their behalf. An employee may also sacrifice a one-off item, such as a bonus.
Within Flexible Benefits forGreat Britain(GB FlexBens), the salary sacrifice principle is applied only to pension plans. A typical pension salary sacrifice scenario is described below:
An employee’s current contract provides for cash remuneration of GBP 40,000.00 per year. The employee agrees with his or her employer that in future, he or she will be paid an annual salary of GBP 35,000.00. In return, the employer makes employer’s contributions of GBP 5,000.00 per year to an approved pension scheme on the employee’s behalf. This agreement is referred to as salary sacrifice.
The Benefits of Salary Sacrifice for Employers and Organisations
The concept of salary sacrifice may be attractive to an employer in terms of achieving National Insurance efficiency and offering more in benefits to an employee, which may form part of a wider human resource retention plan.
Where the salary sacrifice is used to enhance the employee pension, the pension contribution made by the employer in return for the sacrifice is treated by the Inland Revenue as an employer’s contribution. It is, therefore, not subject to Employer National Insurance Contributions (NICs) and is not taxable on the employee.
If the sacrifice is used to purchase other benefits reportable via the P11d form, organisations must consider the cost implications of this carefully. Thus, the most common form of salary sacrifice is for either salary or a bonus to be sacrificed to provide employer pension contributions. GB FlexBens supports exactly this type of pension salary sacrifice.
The NICs savings made by an employer can be simply retained as a saving by the employer, or can instead be passed onto the employee. Each organisation implementing GB FlexBens must decide how they wish to handle these NICs savings resulting from a salary sacrifice option.
For more information on this topic, see
Pension Payback
, under
Features
.
The Benefits of Salary Sacrifice for Employees
If an employee sacrifices a proportion of his or her salary, they achieve a lower base for taxable/NI-able earnings and the potential future cash remuneration sacrificed is not taxable (provided Inland Revenue requirements are met and depending on how the sacrificed amount is ‘spent’).
If the salary sacrifice is based on the employee sacrificing their bonus in return for additional lump sum payments to pension funds, the amount of the bonus would be tax free. However, such savings for the employee may be negligible or non-existent depending on tax bands and NI thresholds. For example, if an employee is a higher rate tax payer, he or she is entitled to 40% tax relief on pension contributions, and lowering their taxable earnings may not achieve a comparable saving. In summary, the following benefits are possible for employees who opt for a pension plan salary sacrifice option:
- Employee receives a “payback” generated from the employer NIC savings
- Employee receives the 15% Inland Revenue limit on total member contributions from income. (That is, the employer pays the pension contributions on their behalf and the amount is not deducted from the employee’s income).
- Some savings may be derived for employees from paying less tax or NIC’s on their income.
Statutory limits in respect of total contributions to the pension fund still apply. In the case of overpayment resulting from any additional employer payments made due to salary sacrifice, it is the responsibility of the pension provider to reconcile this with the pension scheme member (employee).
Prerequisites
- You must have implemented a salary sacrifice option for your Flexible Benefits pension plans, in the
Benefits Administration
IMG, under:Plans
→Pension
Plans
→Assign Pension Plan Options Attributes (FLEX)
(V_T74_FBN_GB08). - The ‘sacrifice’ must be agreed in advance between the employee and the employer.
(In the case of a bonus, it is possible the employee will not know the amount of the ‘sacrifice’ at the time the agreement is made.)
- The salary sacrifice must relate to remuneration that would otherwise have supported the salary payment.
Features
Pension Payback
If you have implemented salary sacrifice for a pension plan which also has National Insurance Cost Neutrality applied, you must determine whether any employer (NICs) savings produced as a result of the salary sacrifice are paid back to the employee. This process is referred to as pension payback.
You must set the
Pay back to Pension
indicator as part of customising your pension plan attributes, in the
Benefits Administration
IMG, under:
Plans
→
Pension
Plans
→
Assign Pension Plan Options Attributes (FLEX)
(V_T74_FBN_GB08). In this IMG step, you define whether employer NICs savings resulting from the application of NI neutrality are paid back in the form of increased employer pension contributions on behalf of the employee.
The
Pay back to Pension
indicator is read by the GB FlexBens system. When you display the relevant plan detail screen, if this indicator is set as 'X', the system will calculate and display the pension payback amount.
Setting the
Pay back to Pension
indicator results in the pension payback amount being added back into employer pension contributions. However, there are a number of other possibilities for this payback amount. It could also be:
Retained by your organisation
Paid back to the employee as a salary enhancement
Used by the employee to fund other Flexible Benefits selections
Wage type customising will be required if you wish to administer any of the above three pension payback administration options, rather than return any pension payback amounts in the form of increased employer pension contributions.
Customising will involve assigning a pension payback wage type in the Payroll GB IMG, under:
Benefits
→
Assign Flexible Benefits Plan Wage Types for Benefits Plans (FLEX)
and configuring the wage type's attributes. This pension payback wage type will be handled by the payroll, depending on your payroll schema and on your wage type configuration, such as processing class setting, cumulation class and so on.
Salary sacrifice pension plan where any payback surplus is returned in the form of increased employer pension contributions.
The formula for calculating the NIC payback amount in this particular pension salary sacrifice scenario is different to the formula used to calculate this payback amount for all other plans in GB FlexBens. This Pension Plan salary sacrifice NIC formula is as follows:
Payback Amount = Sacrifice Amount x [Applicable NI Rate/100]
The formula is different in this situation as the payback amount is not adjusting the employee’s salary, but is instead being paid as an increased pension contribution.
Legal Aspects
Because salary sacrifice involves a change to terms and conditions of employment, it is best practice that an employee should ‘sign’ their approval before they enrol for this benefit option. It also provides an audit trail for the Inland Revenue in the event of any investigation.
Furthermore, if an employee opts to sacrifice an amount more than GBP 5,000, this must be reported to the Inland Revenue.
Opting Out
Regardless of any life event changes, if employees select a salary sacrifice option based on reduction of salary, you should seriously consider implementing a rule that they must remain with this choice for the whole of the benefits year.
If an employee were to opt out of a salary sacrifice arrangement part-way through the benefits year, the Inland Revenue would regard the sacrifice as invalid and consider all earnings involved in the sacrifice as liable to tax and NICs at the full rates.
Example
For a more detailed salary sacrifice example, see Salary Sacrifice Payroll Scenario .