The problems with the supply chain, the growing prices, and the energy crisis are all having an effect on the smaller enterprises in the UK. They are attempting to save money everywhere they can since many people are afraid that the business may have to permanently close.
The benefits package that you provide to your employees plays a significant impact in this regard. The contribution of a portion of an employee’s pay to a workplace pension plan is one way for firms to realise cost savings. Although you will be required to make payments to employee pensions, you will also be eligible for significant tax breaks.
A pension plan at work can be beneficial if it is established appropriately and managed effectively. However, due to the complexity of group pensions, the process of establishing one may seem overwhelming. There is a great deal to think about, as well as a stringent set of regulations to follow.
Employers are required to participate in pension programmes. Many go with the supplier that is managed by the government, which is Nest. However, this does not always indicate that it is the best choice for your company to make in this situation. You run the risk of missing out on the benefits of salary sacrifice as well as the services offered by other pension providers.
We are going to discuss the various ways in which your small business may use salary sacrifice to their advantage and save money as a result.
What is a salary sacrifice workplace pension?
The salary sacrifice arrangement is an alternative to the net pay arrangement that provides you with additional benefits. The employee and the employer come to an agreement in writing to give up a portion of the employee’s regular pay in exchange for a financial benefit. Along with the payments you make, this goes towards building up their pension fund.
Because the deduction from the paycheck takes place before taxes, salary sacrifice plans are an effective approach to save money for retirement.
What savings can be made?
Through the use of a salary sacrifice workplace pension, both employees and employers can realise financial benefits. Because of this, businesses are able to maximise the benefits of their pension plan.
When an employee decides to contribute a portion of their regular income to their pension, they are eligible for a reduction in their tax liability. They have lower National Insurance premiums as a result of their reduced monthly income due to wage sacrifice (NI).
Through participation in a salary sacrifice pension plan, employees are able to take home a larger paycheck on payday. After making the salary sacrifice, the individual will have a less amount of taxable income remaining. As a result, they have a lower NI contribution. In point of fact, they will be able to reduce their National Insurance Contributions (NIC) by 13.25 percent of the amount that they sacrifice from their earnings that are in excess of the main level (which will be set at 12,570 pounds for the tax year 2022/23)
If an individual earns £25,000 per year and contributes 5% of that amount to their pension, then that employee may save around £10 per month.
However, a recent Workplace Pension Survey conducted by employee benefits firm Drewberry revealed that 48% of employees do not comprehend either the tax relief or the pay sacrifice. It’s possible that your employees won’t be able to take advantage of the aforementioned savings if they don’t fully grasp the concept of wage sacrifice.
A workplace pension that allows employees to make pay sacrifices might be beneficial for more than just the employees. Every month, employers are required to deduct National Insurance Contributions (NIC) from the wages of their employees. If an employee chooses to lower their compensation in exchange for other perks, the firm will also receive some of those benefits. Employers can save up to 15.05 percentage points in national insurance contributions (NIC) if their taxable income is lower.
Here is an illustration of a possible reduction in expenditures: You might save a total of £141.17 in National Insurance Contributions (NIC) for each employee over the course of a single year. This estimate is based on the assumption that each employee has a yearly salary of £25,000 and contributes 5% of that salary to their pension. The amount of money saved is directly proportional to the number of employees registered. Salary sacrifice has the potential to save an employer up to £4,000 per year when applied to a workforce of thirty people for whom the employer makes pension payments.
Now that you are an employer, you have the option of keeping these National Insurance savings for the firm, which will help you save money. You might alternatively choose to provide the savings to your employees as an increase to their pension pool, which would help them save more money overall.
In addition, if the “wholly and solely” criteria is passed, pension payments can be deducted from an individual’s taxable income. When these are recorded as expenses, the resulting sum is removed from consideration for the corporation’s tax liability.
Employers are feeling the effects of the rising cost of living in a substantial way. Not only are they looking for methods to cut expenses for the company, but they are also brainstorming solutions for how they might assist their staff in coping with the growing expenditures. Both employees and employers can benefit from a pension plan that involves salary sacrifice since both parties have the opportunity to save money. Taking advantage of pay sacrifice may result in cost savings, as well as increases in both productivity and morale among employees. This may also have a good influence on a company, as increased pension contributions are one of the things that employees look forward to the most in their jobs.
However, in order to get the most out of it as a benefit, businesses need to make sure they explain what they provide. Forty one percent of workers were ignorant of their employer’s monthly pension payments, which makes it difficult to get the most out of it as a benefit.
It is in your best interest to consult with a financial professional before making any decision pertaining to the finances of your company. Drewberry offers corporate pension advice to firms of all sizes and can assist in ensuring that the process of modifying your workplace pension is carried out in an orderly fashion.