Is Auto Enrolment costing you and your employees money?
Nearly 7 years on from its introduction, auto enrolment is part of every day working life and now we are over the final increase of contributions, employees can get used to the notion of contributing to retirement in the same context as paying tax or National Insurance.
With the dust settling, professionals are now starting to analyse the detail of employer’s decisions to meet compliance and raising concerns with elements of the process, and more specifically the method of deduction from employees pay.
Net pay arrangement
A number of pension schemes used by SMEs have been set up to deduct contributions from employee’s net pay, receiving basic rate tax relief at the source. This is a popular and straight forward way of making pension contributions, with schemes like NEST offering this method exclusively.
Businesses can meet their compliance obligations and avoid the contractual complexities of a salary sacrifice pension scheme by doing this. However, if any of the scheme members pay tax at the higher or additional rate, they would lose the benefit of tax relief above the basic rate and would have to claim the lost tax relief via requesting a change in tax code or self-assessment, which for employees may be an unfamiliar concept.
Once higher paid employees are left with the choice between self-assessment and salary sacrifice, salary sacrifice may then become a more attractive solution, not only from a convenience point of view, but because there are also savings when it is in operation.
Employers may offer employees the option of salary sacrifice as part of their pension scheme or use as their default option for auto enrolment. Employees would give up part of their salary, which their employer then pays into their pension, along with the business’ additional contribution.
As the employee is then effectively earning a lower salary, both employer and employee pay lower National Insurance Contributions (NICs). Employers may also choose to pay part or all of this NIC saving into the employee’s pension.
Minimum employee contributions increased from 5% to 8% in April 2019, this means employees could suffer a significant loss if they are not claiming the lost tax relief on their pension payments under the net pay arrangement, but more importantly, the most tax efficient way for both the employer and employee may be to use a salary sacrifice pension scheme and if they aren’t already doing this, both could end up out of pocket.
For a discussion about the benefits of changing your scheme from a net pay deduction pension scheme to a salary sacrifice scheme please call James Alesbury on 02380 461222.