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Implementing salary sacrifice

How salary sacrifice works

Employees can maintain their pension payments whilst seeing an increase in their take home pay thanks to a tax hack called Salary Sacrifice.

When an employee agrees to take part in a salary sacrifice scheme, they essentially agree to use a percentage of their gross annual salary for their pension.

Instead of paying a portion of their earnings into their pension each month, they agree to have that same amount deducted from their salary and contributed directly to their pension.

This means they are reducing their monthly take home pay now in exchange for more money in their pension for the future. It also reduces the amount of National Insurance a company owes. Because they earn less, they owe less tax, so get to keep more of what they earn overall.

National Insurance tax is calculated on gross salary – before any deductions. Reducing an employee’s ‘on paper’ salary means you’ll owe less in employer National Insurance contributions.

Here are a few things that may affect your decision to switch to a Salary Sacrifice scheme:

Low income

You won’t be able to use Salary Sacrifice where it would reduce an employee’s earnings under minimum wage.

Salary based benefits

Any life insurance or loan applications that are linked to salary may also be affected. Typically applicants can provide a lender with a letter or statement explaining that your employee is part of a Salary Sacrifice arrangement - but it might be worth double checking if they’re applying for a loan or mortgage.

Maternity/Paternity pay

Typically, statutory maternity and paternity pay is calculated on average weekly earnings. This means you could receive less if your overall salary is reduced.

Employer | Steps to implement Salary Sacrifice

Before employees can start using Salary Sacrifice, both Penfold and you as the employer have responsibilities to fulfil. Further information can also be found here.

1. Penfold runs a Salary Sacrifice explainer webinar (±20 minutes) - this can also be included in the Welcome session to employees. Content within the session:ㅤ

  • What is Salary Sacrifice?
  • Benefits
  • Considerations
  • Employee salary examples
  • Company pension scheme setup
  • How to opt in to salary sacrifice

2. We circulate a form during the webinar and via email which can be filled out by each individual wishing to opt in to the scheme. This email would be sent the day of/after the session.

3. On the ±15th of the month, Penfold shares the list of employees wishing to opt-in. This is via the Pension Amendment Reports that we send to employers/payroll teams to update payroll before the next pay run.

4. A letter of agreement needs to be sent to each employee opting in. This needs to be signed and kept on file to authorise and confirm the scheme opt-in and adjustment of the employment contract. Please see below for guidance on letter copy.

  • Note: The employee is not formally opted in to salary sacrifice until this letter has been signed by the employee.
  • In the event that an employee has requested more than one contribution percentage amendment, the most recent percentage communicated to Penfold will be used.

5. Each month, we will share, via the Pension Amendment Report, any additional employees who fill out the form and wish to be opted into the salary sacrifice scheme.

Contractual Salary Sacrifice

Please find below a suggested Salary Sacrifice for Pension purposes clause, which may be used in the contract of employment.

Please note, this document is provided as guidance only and is not intended to be a substitute for specific legal, pension or tax advice.

Salary Sacrifice for Pension Purposes Clause

The Company operates a qualifying pension scheme which is available to you to join through a tax efficient salary sacrifice scheme. Under this scheme you agree to sacrifice part of your salary in return for a contribution to a pension scheme by the Company on your behalf. 

If you are in agreement with the salary sacrifice scheme, the amount deducted from your salary will be £[amount]/[percentage] [each month] / [annually]. Your post sacrifice salary will therefore be £[amount].

In return The Company will contribute £[amount] [weekly]/[monthly] to your pension. 

The Company’s contribution to your pension will, as a result of the salary sacrifice scheme, be exempt from tax deductions and national insurance contributions.

(Optional, if passing on Employer savings) The Company will contribute to your pension scheme (optional: X% of) any NIC savings made as a result of this salary sacrifice scheme.

A salary sacrifice for pension purposes will only apply whilst you are an active member of The Company’s pension scheme. Opting-out of the pension scheme for any period of time will not prevent you from availing of this salary sacrifice agreement again, should you obtain membership of any Company pension scheme in the future. If you choose to opt-out of the pension scheme your salary will return to the pre-sacrifice amount. 

Further information regarding the scheme benefits and rules can be obtained from your manager.

Activation of this salary sacrifice scheme will result in a contractual change to your salary.

Employee | Steps to implementing Salary Sacrifice

  1. Employees need to understand the benefits and considerations of salary sacrifice to make an informed decision on opting in to the scheme
  2. Employees can register their interest in opting into the salary sacrifice scheme via this form (which includes the option to adjust the percentage of salary sacrificed per month)
  3. Employees then need to sign the letter sent by The company agreeing to the amendment of their employment contract
  4. Should you wish to adjust the percentage of your salary sacrifice or opt out of the salary sacrifice scheme, you can do so via the Penfold app or complete the form again. You will also be required to sign another contract amendment letter.

Learn how to save money with salary sacrifice

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