Opinion leading organisations are already, prior to auto-enrolment, actively encouraging their employees to invest in pension provision. One way they are doing this is by rebating some, or all, of any NI savings made by sacrificing salary into a pension.
If an employee sacrifices (or exchanges) salary for some form of a benefit their pre-tax income reduces. The key benefit of this is that there is a potential NI saving, for both the employer as well as the employee, on the amount sacrificed. Of course both parties only save if the benefit that the sacrificed salary is used for is, itself, tax free such as a pension.
Employer's NI saving
The current employer's NI rate is 13.8%, so a significant sum of money can be released if employees are encouraged to sacrifice salary into tax free benefits. Employers can choose to keep this "saving" using it to fund their benefits administration or to simply contribute to overheads.
However more progressive employers are choosing to use a proportion of the saving to subsidise the employee's pension thereby creating a virtuous circle - encouraging the employee to sacrifice more.
Calculating the amount to rebate
Some schemes are set up with a Flex or Benefit Allowance that is "given" to the employee to spend on the employer's behalf on a range of benefits to suit them. Some schemes treat the employees spend on many or all benefits as employer side. So how do you calculate the amount that you could rebate in these circumstances?
We would recommend the following:
- You only want to rebate on salary sacrifices to the Pension
- You do not want to count any Flex Allowance given to the employee
- You assume if salary is being sacrificed for multiple benefits, the last thing salary is sacrificed for is the pension
So the amount available to give a rebate on is
- If Salary Sacrifice = 0, nothing
- If Pension Spend < Salary Sacrifice, Pension Spend
- otherwise (Pension Spend >= Salary Sacrifice), Salary Sacrifice
How much should be rebated
This is down to the specific organisation but most employers would give at least half back to the employee as a pension subsidy.
