Salary sacrifice can provide at least one option to help with the cost of living, writes KATIE MEARNS
With the cost of living rising by the day the key priority for many people is simply figuring out how they might pay the bills. At the same time as prices are rising it seems wages are falling or sluggish at best, and with the energy cap set to rise again later in the year even the likes of Martin Lewis now find themselves short of solutions to help people to manage their budgets.
For thousands around the country they are now having to decide what they may need to sacrifice so they can afford the essentials in life and whilst we can hope that the current cost of living crisis will be temporary some people may be tempted to make decisions now that could have a detrimental impact on their lives in years to come.
The crisis is happening now, not in the future, and one area that could be seen by some as a reasonable way to reduce outgoings is to look at longer term commitments, specifically your pension. For many younger people, a pension is a benefit you’ll not see until decades into the future so why not try and reduce your costs here and what’s the best way to do it?
Well, one option which may not be too familiar to individuals and employers is salary sacrifice – it’s an approach which can be hugely beneficial to both.
In short, salary sacrifice is a smarter way for employees to make contributions – it’s a method of saving National Insurance Contributions (NIC) for employers and employees.
It sounds a bit alarming, anything with the word sacrifice inevitably does, and in a recent survey by corporate pension provider Cushon, almost a third thought they would lose out on pay. The reality is very different.
Managed in the right way it can provide at least one option to help with the cost of living now, but it can also be suitable for longer term pension planning.
Under a salary sacrifice scheme, employees agree to reduce their salary by an amount equal to their pension contribution and employers then pay their total pension contribution, saving both the employee and the employer due to lower NIC payments.
With NIC rates increased in April by an additional 1.25% this is not to be sniffed at, and there is now a stronger case than ever for employers to consider it as an option.
According to analysis from Cushon, someone using a salary sacrifice scheme and earning £30,000 a year could save £200 in NI. In addition, UK businesses could be losing out on around £2 billion by not using salary sacrifice.
If an employer decides to use salary sacrifice, their employees take home pay is actually higher without affecting their pension contributions.
Now pensions, for both employers and employees, can be complex at the best of times and decisions such as this should never be taken lightly.
There is no doubt it is a significant step for any employer – you are dealing with the future finances of your employees after all.
That said, for employers that do offer this an option for their employees, it should be a viewed as a positive step.
For employees who are offered the option by their employer but choose not to take it up, they will effectively be missing out on free money from the government.
We have been advising an increasing number of businesses on salary sacrifice during the last year or so, and the momentum towards this approach to pensions is certainly growing.
However, it is important to say that a salary sacrifice scheme may not be suitable for every employer or every employee and it is absolutely critical to seek professional advice.
Salary sacrifice isn’t as scary as it sounds – some prefer salary exchange, or maybe we need to change it to salary supplement?
Katie Mearns is a corporate benefits adviser at Aberdein Considine