The benefits of... implementing salary exchange for your business and your employees
What is salary exchange? Salary exchange, also commonly referred to as salary sacrifice or smart pay, is an arrangement where your employees give up part of their future earnings in exchange for a non-cash benefit. Here we focus on its use for pension contributions. As the salary is being exchanged rather than paid, both you and your employees do not pay National Insurance Contributions (NIC) on the exchanged amount. The exchanged amount can then be paid into the employee s pension plan as an employer contribution. This means that whilst the same pension contribution amount is received, both you and your employees benefit from both tax and NI savings. Salary exchange is suitable for almost every employer running a pension scheme. In the past salary exchange schemes were mainly used by larger employers due to the complications of setting them up and running them, however due to the rule changes made by HM Revenue and Customs (HMRC), it is now much more straightforward to implement, and operate alongside auto-enrolment. Establish a salary exchange scheme and benefit immediately from the savings. 2 Salary exchange
Pension costs are increasing With mandatory pension contributions due to increase in April 2018 and again in April 2019, the amount your business is paying towards your employees pension will no doubt increase. Tax year 2017 2018 2019 Minimum employer contribution 1% 2% 3% Minimum employee contribution 1% 3% 5% Take a look at our savings calculator for an indication of how much you could save Click here > www.johnsonfleming.com/salaryexchange https://www.johnsonfleming.com/edenred/salaryexchange/ https://www.johnsonfleming.com/salaryexchange/ 3
Cost savings for your business With employee pension contributions due to increase to 5% over the next few years under automatic enrolment, the potential savings salary exchange can have for your business could be significant. 2018 2019 Minimum employer contribution 2% 3% Minimum employee contribution 3% 5% Annual payroll Annual saving 75,000 310.50 518 150,000 621 1,035 250,000 1,035 1,725 500,000 2,070 3,450 1,500,000 6,210 10,350 3,000,000 12,420 20,700 6,000,000 24,840 41,400 12,000,000 49,680 82,800 The total estimated employer national insurance contribution saving is based on all employees on payroll paying pension contributions on the minimums stated for that year. The pensionable salary definition assumed is qualifying earnings. Where employees might pay higher contribution levels than the minimum stated, or if contributions are based upon an alternative pensionable salary definition (certification set), savings may differ. Based on current employer National Insurance rate of 13.8% which may be subject to change. 4 Salary exchange
Cost savings and benefits for your employees Basic rate tax payer earning 25,000 per year 5% pension contribution Difference to monthly take home pay Without salary exchange 83.33 With salary exchange 70.83 Annual saving 150 per year Assumptions: 2017/18 National Insurance and Income Tax rates which may be subject to change. Your employees receive an increase in their take home pay whilst maintaining the same level of pension contribution. NIC saving on sacrificed contributions of between 2% and12% (dependent on earnings). Higher or additional rate tax payers will receive their higher rate tax relief at source, rather than having to reclaim it through annual assessment. By making salary exchange the default option (with the ability to opt out), there s no requirement for your employees to complete any paperwork. https://www.johnsonfleming.com/salaryexchange/ 5
Salary exchange implementation service 1,295 * We can establish an HMRC qualifying salary exchange arrangement for you. What s included? Review of your employment contract by an employment law specialist to ensure the amendments will be fit for purpose. Amend your employment contracts to make salary exchange the default way to make pension payments. Provide guidance as to which employees salary exchange may not be suitable for. Provide employee communications, increasing engagement to make this change a success. Notify your scheme provider and obtain HMRC approval. Toolkit only If you have the internal resource to implement salary exchange yourself, we can supply you with our salary exchange toolkit for only 780*, this will provide you with a step by step guide to setting up salary exchange. Remember though, there is more to this than just informing payroll, as you are amending contracts of employment, and if you don t follow the correct process this may have negative tax implications for both you and your employees. Salary exchange is unlikely to be suitable for those on lower earnings and in order to accurately assess employees you need to take into account their tax code, number of hours worked and any other salary exchange payments being made. * All fees exclude VAT 6 Salary exchange
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Johnson Fleming Services Limited provides support to many leading UK employers regarding the auto-enrolment of employees into Workplace Pension Schemes which is not regulated by the Financial Conduct Authority. Johnson Fleming Services Limited is therefore not regulated to provide financial advice or authorised as tax advisers or employment law specialists. Johnson Fleming Services Limited is registered in England and Wales, registration number 08373606. Registered office: Fleming House, Bromsgrove Enterprise Park, Bromsgrove B60 3AL. JF06042018