A tax break that lowers the cost of auto-enrolment

Auto-enrolment recap

As you probably know, the auto-enrolment(AE) rules require that you include all employees who are between 16 and state retirement age and earn more than the so-called earnings trigger (£833 per month for 2015/16) in your firm’s pension. Those employees who earn less than this but more than the AE lower threshold ( £5,824 per year) have the option of joining your pension scheme, but you only need to include them if they ask you. Once in the pension scheme both you and the employee must pay into it.

How much?

The contributions payable can be worked out in a number of ways, but broadly theminimum rate is 2% of each employee’s wages above the lower threshold, equally split between you and the employee. From 1 October 2017 the rate will rise to 5%, of which your share must not be less than 2% in total. From 30 September 2018 the rate increases to 8%, with at least 3% coming from you.

Paying for the contributions

While you’re a good employer, you naturally won’t want to pay more AE contributions than you have to. The difference between the amount you pay and the minimum therules require, must be paid by the employee. This is where a tried and tested tax breakcould be used to save you money. It might sound odd, but paying your employees’ AE contributions as well as your own can reduce your overall costs. We’re not suggestingthat you simply take on their liability full stop, rather that you pay their contributions as part of a salary sacrifice arrangement.

How a salary sacrifice works

Under a salary sacrifice arrangement you’ll take on your employees’ shares of the AE pension contributions in exchange for them agreeing to reduce their salary by acorresponding amount. It’s an equal exchange – there’s no net cost, just tax and NI savings for you and your workers.

Tax and NI savings

Paying your employees’ pension contributions doesn’t count as a taxable benefit in kind for them. So a salary sacrifice simply swaps taxable salary etc. for a non-taxable perk. You’ll also be better off because by reducing your employees’ salaries there are fewer earnings on which you must pay employers’ NI contributions.

Example. In 2018/19 Acom Ltd employs 15 workers who earn between £15,000 and £70,000 per year. The average of all their AE contributions is £1,500 per year. If asalary sacrifice is used the average annual tax and NI saving for each employee will be £480 (£1,500 x (20% tax + 12% NI)) and your NI saving will be £207 (£1,500 x 13.8% employers’ NI). Tip. HMRC is happy for employers to use salary sacrifice schemes, including those involving AE contributions. However, to be effective the arrangement must be voluntary for your employees. Plus, you must give them a full explanation ofthe terms and consequences of the arrangement (see The next step ).


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