Many charities are looking for ways to increase staff benefits in an efficient way. For independent schools not using the Teacher’s Pension Scheme, pension salary exchange can help employees save towards their retirement.
Its use can also help employees to reduce their tax burden, especially where their earnings are close to thresholds. Where there is a higher rate of income tax, it will help protect the entitlement to free childcare.
Set out below is an action plan to help put a pension salary exchange in place.
1. Creating your action plan
Consideration will need to be given to the viability of setting up a pension salary exchange, for example:
- Who will be responsible for overseeing the pension salary exchange?
- Who is eligible to participate in the scheme?
- What are the potential National Insurance savings which can be generated?
- How to ensure employees are aware of the benefits and downsides of participating in a pension salary exchange.
2. Staff participation
In terms of participation, the more employees who take part, the greater number will benefit from the savings, as will the employer.
3. Notifying employees
The employer should notify all employees regarding the intention to introduce a salary pension exchange and:
- Provide details of the pension scheme you are proposing to use.
- Explain why you are proposing the use of a pension salary exchange.
- Explain the advantages of entering into the scheme.
Similarly, employees also need to be aware there are some disadvantages too. So, you should provide illustrations to demonstrate the pre/ post pension salary exchange position.
4. Discuss with key participants
While the employer and its employees will benefit from the arrangement, it is also important to consult with your pension scheme and payroll providers, advising them that you are proposing to set up the arrangement.
You will need to prepare the key documents, including letters and/ or emails which will help to vary the terms and conditions of employment.
5. What are the key messages?
The following provides a summary of the topics which need to be conveyed to employees:
- The employee agrees to a reduction of their salary by an amount equal to their pension contributions.
- The employer agrees to pay the employee pension contributions, which are added to the employer’s pension contributions as total employer-only contributions.
- Both the employer and the employee pay less National Insurance.
It is not uncommon for the employer to share all or part of their National Insurance savings with the employees in the form of additional pension contributions.
6. Long-term participation
Employers will want to ensure long-term participation in the pension salary exchange arrangement, so the employee needs to be made aware that they will have to participate for a minimum period of 12 months. Consideration will also need to be put in place to consider any lifestyle changes which will enable the employee to stop participating in the arrangement on a temporary basis.
There are downsides too, which include the following:
- The pension salary exchange must not bring an employee’s earnings below the national minimum wage limits.
- Lower life cover is often calculated as a multiple of salary and the arrangement will make the salary figure lower.
- Currently not beneficial to employees over pensionable age.
- Potential impact on state-related benefits.
Generally, the positives are seen as outweighing the downsides, though.
7. Post implementation
As with many projects, a lot of work is carried out leading up to its implementation. However, it is important to consider the following:
A. Obtain staff feedback.
B. Ensure all new employees receive the same information.
C. Continue to promote the arrangement during the year. Where the employer has retained some of its National Insurance savings to help fund a staff award scheme, it can be a simple arrangement for example, providing gift vouchers where any employee has done a good job.
The employer can meet the income tax and National Insurance liabilities due on the gift via a PAYE settlement agreement.
Nick Bustin is an employment tax director at haysmacintyre
