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More companies say they will use salary sacrifice plans to structure their staff pension arrangements to reduce the impact of the tax changes announced in the Budget.
Companies such as J Sainsbury, JD Wetherspoon and BT have made this week attacked Chancellor Rachel Reeves plans to raise up to £25bn a year by increasing employers’ national insurance contributions from next April.
The measure has sparked great interest in salary sacrifice schemesin which employees give up a portion of their salary in exchange for their employer paying those funds directly into their pension.
The arrangement, well established among larger employers but much less common among smaller companies, allows employees to pay less income taxes since they receive a lower main salary. However, as employers’ national insurance does not tax staff pension contributions, businesses now have more incentive to use these schemes.
In the wake of the budget, more than one in five small and medium-sized business owners said they were now “more inclined” to use salary sacrifice arrangements on pension contributions, according to a survey of around 900 UK businesses commissioned by Global Payroll Association.
From April, the salary threshold at which employers start paying NI will be reduced from £9,100 to £5,000, and the tax rate will increase from 13.8 per cent to 15 per cent.
Nick Bustin, head of employment tax at chartered accountant Haysmacintyre, said conversations with clients in the days after the budget had “revolved almost exclusively around the pension pay sacrifice”.
While some smaller businesses will be able to use the expanded employment subsidy to mitigate NI increases, not all will do so. meet the criteria. “We are talking to low-staff technology companies, organizations in the health sector and the education sector,” he said.
Smaller businesses have traditionally avoided such plans because of the complication it adds to their payroll process, but advisers said this is now likely to change.
“Historically it hasn’t been worth it for them,” said Robert Salter, director of business advisory firm Blick Rothenberg, adding: “What I suspect is that smaller companies in the coming weeks will consider the salary sacrifice.”
Under current automatic enrollment pension rules, the total minimum contribution to a qualified pension plan is 8 percent of an employee’s earnings, of which 3 percent must be paid by the employer. The employer pays 8 percent (or more, depending on pension policy) when an employee uses a pension salary sacrifice plan.
“A critical question in all cases is what happens to the costs saved by the employer: generous employers give it all back to the employee in additional pension contributions, but this is not always the case,” said pension specialist Tom McPhail. of the consulting firm. Lang the cat.
Steven Leigh, associate partner at professional services firm Aon, estimates that a small business with 10 employees each earning £35,000 would see their NI bill rise by £9,200 following the Budget changes.
But by putting 5 per cent of its employees’ income into pensions rather than wages, the company would save £2,625, offsetting around 30 per cent of the increase in employers’ NICs. Employees would save around £140 a year on employee NICs.
“Most companies with more than 100 employees would already offer this,” Leigh said. “For those companies that don’t offer it, it’s become even more obvious.”
When evaluating the merits of salary sacrifice plans, advisors warn that employers should be careful not to reduce employees’ cash earnings below the minimum wage.
“It’s a big risk for businesses to consider,” said Neil Carberry, chief executive of the Recruitment and Employment Confederation, a trade body for recruiters. “The minimum wage has risen 26 per cent in the last three years – wages over £20,000 may disappear.”
Employees should also consider statutory maternity pay, Leigh adds. “Legal maternity remuneration is linked to the salary at a given time. “So if someone used salary sacrifice, their salary could fall below a certain level, which could mean they would have a lower level of statutory maternity pay in the future.”
For higher-earning staff, the benefits of salary sacrifice include the ability to get around frozen income tax thresholds by saving more into a pension. Staff on the cusp of the £60,000 threshold, where child benefit begins to withdraw, could save more into their pension and keep more of their benefits. Similarly, parents on the verge of winning £100,000 could keep valuable childcare benefits, including tax-free childcare and “free” childcare hours.
Additional information from Claer Barrett