Only 41% of SME businesses offer a pension salary sacrifice scheme to their employees compared to 61% of large and 85% of very large companies.(FT Advisor). Even less offer salary sacrifice arrangements to their employees and I often question why this is the case. Many employers don’t take up the option with their employees as they believe that salary sacrifice can be costly, complicated to administer and difficult to implement, sadly this is not the case. Whilst it is important that the correct process is followed, it can be a simple and effective way to engage with and remunerate your employees.
The definition of a salary sacrifice scheme is where an employee agrees to exchange part of their salary in return for a different benefit. Common benefits include pension contributions, pension advice, health care, additional holiday, childcare costs and cycle to work to name but a few. As a salary sacrifice is considered a contractual change with the employee, the correct paperwork has to be put in place that clearly defines the salary and rights pre and post sacrifice and this should be in advance of any sacrifice arrangement undertaken.
Personally, I feel that salary sacrifice schemes should be considered by more employers. It is a great way to enhance the offering to your employees that removes the focus from pure salary to areas of their lives that may be more important to them – this can make for a happier, more productive workforce which in turn leads to a more profitable business. As well as the benefits that existing employees may feel, this is also a valuable recruitment tool when looking at prospective employees as you will stand out as being positively different from your competitors.
Two main features of the salary sacrifice arrangement concentrate on additional holiday and pension contributions.
First of all, it is important to dispel the thoughts that additional holiday means you will have to recruit more staff to cover the time that they have off. If implemented correctly, this is not necessarily the case, it has been shown in many situations that staff that are more rested and given time to spend with their families or pursuing interests are likely to be more productive compared to just being provided with normal holiday. Therefore a win-win for everyone – employees get valued time off – employers save money whilst maintaining production levels. Two ways in which a holiday salary sacrifice can be brought in are as follows:
- Purchasing up to two weeks extra holiday on top of the statutory allowance (this could be charged at a premium, for example 1 weeks holiday could be charged at 110% of the value of a normal week and 120% for the 2nd week).
- Specifically purchasing a half day each week – maybe a Friday afternoon or a Monday morning (this could help for those odd sick days that may creep in on those days, again a small premium could be charged)
Holiday is one of the most popular choices on our own salary sacrifice scheme although it is important to remember that salary sacrifice is not the only way to give employees valuable time off. Being creative with working hours can be an alternative and this doesn’t affect salary sacrifice. Whilst employers have been implementing flexi time for many years, a restriction for professional firms tends to be that the core hours that need to be covered are 10am to 4pm every day and therefore this feels too restrictive and for those travelling may not actually gain any valuable time.
Nine years ago following a suggestion by a client who had already implemented this working pattern, we looked at changing our core full time hours by working a slightly longer day from Monday to Thursday. This allowed us to give employees 3 Friday afternoons off out of 4, effectively reducing their 5 day a week to a 4.5 day week. This is adopted by 98% of our full time employees and sets us aside from our competitors, especially as our longer day is no longer than the normal working day at the majority of our competitors. Having a 2.5 day weekend is far better in my opinion than gaining maybe an hour during the day or sleeping in for an extra hour.
It is a known fact that many of us aren’t saving enough for our pensions and therefore offering salary sacrifice to employees that allows them to contribute more is a great way to achieve this. As employers, we may not appreciate the financial position of our employees and by allowing this as an option means that those that want to contribute more have the ability to do so. Within our own salary sacrifice scheme, I have seen an increase in the number of employees take up this option.
Pension contributions have national insurance savings to both the Employee and Employer as well as tax savings for the Employee.
An area that we have seen an increase with clients is where annual bonuses are sacrificed by employees and paid as a pension contribution instead – it is important to note that the correct paperwork must be in place in advance of the transaction taking place for this to be an eligible sacrifice. Many employees consider that this is a better way to get lump sums paid into their pension, especially if they are higher rate as they are likely to lose 42% of the bonus in tax and national insurance. Therefore a £5k bonus which would net down to approx.£2,900 if sacrificed, could become a pension contribution of £5,690 instead (if the employer pays the NIC saved as an additional contribution). This is nearly £2k more that is invested into the pension scheme than if the employee had invested their £2,900 net pay into the same scheme!
When undertaking any salary sacrifice arrangement it is important to get the correct paperwork in place and to consider the impact on the gross salary relating national minimum wage. There are other considerations for employees that have to be made including the effect on any statutory payments such as SMP and SSP.
Maybe it is time to review your rewards package for employees to ascertain if you can implement any positive changes.
Please feel free to contact myself or any of the other Partners if you have any queries on pension planning and/or salary sacrifice arrangements.