With the UK enduring soaring inflation, Pete Hykin explains how pensions and Salary Sacrifice schemes can be used to achieve some tax relief and aid workers’ savings efforts.

The UK is facing one of the worst cost-of-living crises in recent memory. Rising fuel prices, higher energy bills and more expensive food costs are all weighing on the minds of individuals and families across the UK.

In amongst these rising prices, the government has also pressed on with its 1.25 percent hike in National Insurance (NI), raising contribution levels for millions of people who are already struggling to cope with a higher cost of living.

However, what many might not be aware of is that pensions can actually be used by both employers and employees to trim their tax bills, with Salary Sacrifice schemes offering savers NI relief on top of their usual pension tax relief, adding an extra boost to savings.


What Salary Sacrifice offers employees

Salary Sacrifice schemes allow employers to reduce their gross salary in return for paying directly into their pension pot, thus reducing the amount of NI they must pay. At a time when people all over the country are struggling to save, this could offer many employees an opportunity to beat the tax hike and save hundreds of pounds a year.

For example, an employee who earns £30,000 a year and contributes £100 a month into their workplace pension via Salary Sacrifice would save £158 over a year in NI taxes.

For businesses who care about their employees and want to attract and retain the best talent, offering a pension which gives them the ability to keep their tax bills under control could be a big selling point for employees. It’s also important to remember that by switching to a Salary Sacrifice scheme, businesses can help their employees make these savings at no extra cost to the business.


What this means for employers

The rise in NI is also having an impact on employers directly. Research shows that in 2020, employer NI contributions accounted for 25.7 percent of all taxes borne by the UK’s biggest firms. From April, employers experienced a 1.5 percent increase, meaning they now must pay 15.3 percent on most employees’ earnings and benefits above £737.01 a month.

Yet, by choosing a Salary Sacrifice scheme, the reduction in their employees’ pay also reduces the employer’s NI contribution. This is because the tax isn’t payable on pension contributions when paid through a Salary Sacrifice scheme. In addition to these savings, employers can also offset pension contributions against corporation tax – further minimising their tax bills.

Despite the potential to significantly reduce tax bills for firms, there are currently many employers not offering Salary Sacrifice schemes. In fact, a recent YouGov survey found that 17 perdent of companies surveyed had never even heard of Salary Sacrifice. Yet, if more employers were to use Salary Sacrifice, not only would it benefit their bottom line, but it could help their employees’ financial wellbeing too.


How to make it work

Luckily for employers, Salary Sacrifice is relatively simple to implement. The key consideration for employers is to offer Salary Sacrifice as an opt in or opt out scheme, as not everyone at your organisation will want to be a part of it. Employers also need to properly explain what it is and how it works to their employees, so they can make an informed decision about whether it’s right for them.

There are three instances where Salary Sacrifice may not be a good idea. Firstly, because Salary Sacrifice lowers an employees’ gross pay, when it comes to applying for a mortgage employees may be lowering the amount they are able to borrow, as their salary will be calculated on a lower level than without Salary Sacrifice. In some cases, old-school brokers will only accept gross pay, which could leave those using Salary Sacrifice at a disadvantage. It’s the same situation when it comes to life insurance and maternity pay too. These are also calculated on gross pay, which means that employees choosing to opt into a Salary Sacrifice scheme could lose out on these benefits, as their earnings are reduced.

Lastly, employers also need to think carefully about what to do with the savings they make on NI by offering Salary Sacrifice to their staff. For example, some employers have decided to put all or part of the savings into their employees’ pension as a gesture of goodwill. We’re seeing this happen more often as employers are waking up to the fact that a generous pension scheme can be a fantastic way to foster employee engagement.

When it comes to communicating Salary Sacrifice, it is critical that employees really understand what it is, how it works and how it could impact their individual circumstances. The right provider can help your company to set up and manage a Salary Sacrifice scheme.

HR teams aren’t always going to be pensions experts, so providers need to offer support to businesses through things such as open forums and easy access to pension experts so employees can ask as many questions as possible and receive timely and bespoke answers to inform their decision.


Pete Hykin is the C0-founder at Penfold.