Monday 25 November 2013

Auto-enrolment and reducing your tax bill


Firstly, what is auto-enrolment and who’s got to pay?
Auto-enrolment, or Workplace Pension Reform, is a new legislation that was introduced by the Government in October 2012, where all employees must be automatically enrolled into a pension scheme, provided they meet certain criteria (below):

What’s the problem?
There are various contribution basis and salary definitions employers can use in order to meet the legislation requirements. These are set to increase in the future, with the first increase due in October 2017, then increasing again in October 2018.

By October 2018, employers will be required to pay at least 3% of the employee’s salary with total contributions of at least 8% of salary. What you may not realise, is that it could be far more tax efficient (and NI-efficient) for the employer to pay the total pension contributions – and here’s why...

Salary Sacrifice
The idea is simple; rather than deducting the employee’s contributions from their net salaries, employees can agree to reduce their gross salaries in exchange for you paying their part of the auto-enrolment contributions. This is called “salary sacrifice”.

But where’s the saving?
Well, by the employee giving up some of their gross salary, both the employee and employer will reduce the amount of NIC’s they pay on that ‘exchanged’ part of the salary. The money the employer saves from reducing salaries can then be paid into the pension fund or used elsewhere within the business. Ultimately, the pension contributions made are the same, but both the employer and employee save on NI contributions.

Employees will also receive higher rate tax relief at source on any contributions they make.  

So, what’s the saving?
With minimum contributions being made, the saving isn’t going to be too substantial. However, when you take that saving, multiplied by 15 employees over a few years, the NIC savings will soon accumulate and reduce your tax bill.

Like with any change in legislation, there are cost implications and salary sacrifice can reduce this cost for many employers. However it is useful to bear in mind that it may not be suitable for everyone.
(It is important to seek advice should you wish to set up your scheme using salary sacrifice.)

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