Auto enrolment in now only some twelve months away. It will commence in late 2012 for larger employers and in stages thereafter for all others, completing in 2016.
The panacea to auto enrolment?
Auto enrolment will come into effect by stages for all employers starting in late 2012 for larger employers with further employers being taken on in stages until 2016. Auto enrolment is intended to help resolve the pension’s gap by ensuring that all employees are enrolled into a pension scheme. The employee can opt out but they will be re-enrolled three years down the line if they have remained an employee of the business. The rules behind auto enrolment will not only affect employers that do not have pension schemes, but may impact on existing schemes if the requirements under auto enrolment are not met by the current scheme. The rules are that every employer will have to enrol employees into a workplace pension those who:-
· Are not already in the pension,
· are 22 years old or more,
· have not yet reached state pension age,
· earn more than the minimum earnings threshold which is likely to be in the region of, £7,500 per annum, and
· who ordinarily work in the UK.
The schemes must be qualifying schemes setting up or amend pension scheme rules will inevitably involve employers in costs that they are not currently incurring. The question is therefore how to mitigate the cost?
Is Salary Sacrifice the answer?
In my opinion, in the majority of cases yes it is. This will save both the employee and the employer money and yet allow the full requirements under the pension reform to be met.
What are the costs?
The overall pension contribution will start at 2% and increase to 8% over time. Establishing or changing the terms of a pension scheme which will involve administration costs. In addition there may also be the costs in respect of time in communicating the requirements with employees and dealing with any queries.
Any mechanism that reduces this cost has got to be a benefit in itself.
Salary sacrifice sounds negative. However, without this arrangement the employee will need to meet the pension cost from net pay, this cost will be reduced through salary sacrifice. The employee will also have the additional benefit of the pension cover which given the value of the state pension, has got to be good news.
Why is this attractive to the employers?
If the employee’s salary reduces, so does the cost of employer’s NIC. The saving can then be retained to meet administration costs of the scheme or could be an additional pension contribution.
The example shown below will demonstrate the savings for both the employee and the employer for an employee earning monthly pay of £3166.65 (£38,000pa) :-
Employee making pension contributions of 5%
| Gross Pay |
£3,166.65 |
| Tax |
£508.60 |
| Employees NIC |
£307.76 |
| Net Pay |
£2,350.29 |
| Less Pension |
( £126.67) |
| |
(based on a net contribution of 5% gross salary*) |
| Take home |
£2,223.62 |
Employer's NIC is £355.71
* the pension contribution in subject to basic rate tax relief.
Pension contributions met under a salary sacrifice arrangement
| Gross Pay |
£3,008.65 |
| Tax |
£477.00 |
| Employees NIC |
£288.80 |
| Take home |
£2,242.85 |
Employer's NIC is £333.91
This represents an Employers NIC saving of £21.80 and an employee saving of £19.23.
This is a radical change to the way in which pensions will be provided, but the process is underway, with some employers already being advised of their staging date. The next step will be to find the most appropriate pension scheme and the most cost effective way of putting an appropriate pension scheme in place. The answer to mitigating the costs may well be salary sacrifice.
Please contact us to discuss the salary sacrifice arrangement or if you require help with finding an appropriate pension. We have people who can help!
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