Wage sacrifice pensions are a tax environment friendly manner for employers and staff to pay right into a office pension scheme. They will help staff improve their take dwelling pay and assist employers decrease their Nationwide Insurance coverage contributions.
What’s wage sacrifice?
Wage sacrifice is a authorities backed scheme to assist employers and their staff save on tax. An worker agrees, with their employer, to surrender a part of their wage in change for non-cash advantages. The advantages are usually not topic to earnings tax or Nationwide Insurance coverage contributions (NICs) so their taxable wage is lowered.
What’s a wage sacrifice pension?
In a wage sacrifice association, staff agree to surrender part of their earnings, lowering their total salaries. The employer agrees to pay these ‘sacrificed’ earnings immediately into staff’ office pensions. By lowering salaries, each staff and employers are topic to decrease Nationwide Insurance coverage contributions. This implies they pay much less tax and get to maintain extra of what they earn total.
How does wage sacrifice work?
Let’s say you supply a wage sacrifice pension to your staff and certainly one of your staff earns £50,000 a yr. The worker decides to sacrifice £2,500 of their wage to their pension. The employer contributes this £2,500 to their pension fund immediately. The worker wouldn’t pay tax on the pension contribution, subsequently their taxable earnings could be lowered to £47,500. This will decrease the worker’s tax invoice by tons of of kilos every year.
Wage sacrifice instance
Right here’s an instance of how a wage sacrifice scheme works for an worker who earns £50,000 a yr.
Earlier than wage sacrifice:
The worker contributes 5%, £2,500, of their earnings into their office pension. The employer contributes an extra 3%, £1,500. Due to this fact whole pension contributions are £4,000. The worker’s PAYE and Nationwide Insurance coverage tax invoice is £9,980.40. After pension contributions and tax deductions the worker’s internet annual pay is £37,519.60. The employer’s Nationwide Insurance coverage tax invoice is £5,644.20.
After wage sacrifice:
The worker earns £47,500 a yr, sacrificing £2,500, or 5%, of their wage. The employer contributes the £2,500 worker sacrifice in addition to the earlier £1,500 employer contribution. Due to this fact whole pension contributions stay £4,000. The worker’s PAYE and Nationwide Insurance coverage tax invoice is £9,780.40. After pension contributions and tax deductions the worker’s internet annual pay is £37,719.60, that’s £200 extra. The employer’s Nationwide Insurance coverage tax invoice is £5,299.20, that’s £345 much less.
Employer Nationwide Insurance coverage financial savings
The financial savings scale up with worker headcount and will help companies lower your expenses on their Nationwide Insurance coverage invoice. Based mostly on a median wage of £50,000 with every worker sacrificing the authorized minimal contribution of 5% the financial savings are: Companies with 50 staff might save £17,250 every year. Companies with 100 staff might save £34,500 every year. Companies with 250 staff might save £86,250 every year.
What are the employer advantages?
There are numerous advantages to providing a wage sacrifice pension, together with: lowered Nationwide Insurance coverage contributions, attracting and retaining the very best expertise, and demonstrating a dedication to worker monetary wellbeing.
What are the worker advantages?
Providing a wage sacrifice pension can present important advantages for workers as nicely. A number of the advantages embody elevated take dwelling pay and larger pension contributions.
What are the drawbacks?
Wage sacrifice can have an effect on something that’s linked to an worker’s wage. Right here are some things which will have an effect on your resolution to modify to a wage sacrifice scheme. Restrictions on low earnings earners, results on salary-based advantages comparable to life insurance coverage or mortgage purposes, and potential maternity pay discount.
Organising a wage sacrifice pension
Organising a wage sacrifice pension may be simple in case your current supplier already offers the choice. Employers ought to contact their payroll or pension supplier, get worker permission, and handle opt-outs for workers that don’t conform to wage sacrifice.
How Penfold will help
Providing a pension with wage sacrifice can present important advantages to each employers and staff. Penfold’s tech-first office pension makes it straightforward for employers to arrange or convert to a wage sacrifice pension. We’ll assist you to lower your expenses with tax environment friendly pension contributions at your online business.
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