Small businesses in the UK are being hurt by problems in the supply chain, rising prices, and the energy crisis. Many people are trying to save money because they are afraid the store will close for good.
This is where your benefits package for employees is very important. With salary sacrifice, a pension plan at work can help a business save money. Even though you have to pay into staff pensions, you can save a lot of money.
A workplace pension can be useful if it is set up well and is used well. But setting one up might be scary because group pensions are hard to understand. There are many things to think about and strict rules to follow.
Employers have to offer pension plans. Many people choose Nest, which is run by the government. But that doesn’t mean it’s always the best choice for your business. You might miss out on the benefits of other pension plans and salary sacrifice.
We’re going to talk about how salary sacrifice can help your small business save money.
What is a salary sacrifice workplace pension?
Salary sacrifice is a better way to get more benefits than a net pay setup. The employer and the worker sign a contract that says the worker will give up part of their monthly pay. This adds to their pension fund along with the money you put in.
Salary sacrifice plans are a good way to save for retirement because the money is taken out of your pay before taxes are taken out.
What savings can be made?
There are savings for employees and employers through a salary sacrifice workplace pension. These enable companies to get the most out of their pension scheme.
When an employee agrees to give some of their monthly pay to their pension, they get a tax break. Since salary sacrifice lowers their monthly income, they pay less National Insurance.
Through a salary sacrifice pension plan, employees take home more money when they get paid. This is because after salary sacrifice, their taxable income is less. That means they pay less NI. In fact, they can save 13.25 percent of the amount sacrificed on earnings above the primary threshold (£12,570 for tax year 2022/23) in National Insurance Contributions (NIC).
A worker who makes $25,000 a year and puts away 5% of that into their pension can save about $10 a month.
But a recent Workplace Pension Survey by employee benefits consultant Drewberry found that 48% of employees don’t understand salary sacrifice or the tax relief. If your employees don’t know what salary sacrifice means, they might miss out on the savings listed above.
A salary sacrifice pension at work is helpful for more than just your employees. Employers must pay NIC every month on their workers’ wages. If they choose salary sacrifice, the company also gets something out of their lower pay. Employers can save up to 15.05 percent in NIC because their taxable income is lower.
Here’s an example of how costs could be cut. In NIC, you can save each employee £141.17 in a year. This estimate is based on the fact that each worker makes £25,000 a year and puts 5% of that into their pension. The savings went up with the number of employees who joined. If you pay pension contributions for 30 employees, salary sacrifice could save you up to £4,000 a year.
As an employer, you can now choose to keep these National Insurance savings for the business, which will help you save money. Or, you can give the money you saved to your employees to help them save more and add to their pension funds.
Plus, pension contributions are an allowable tax deduction if they pass the ‘wholly and exclusively’ test. Putting these through as an expense means the amount isn’t subject to corporation tax.
The rising cost of living has a big effect on employers. They are not only trying to find ways to lower business costs, but also ways to help their employees deal with the rising costs. A salary sacrifice pension plan is good for both employers and employees because both can save money. Using salary sacrifice saves money and can even improve work performance and morale. This can also be good for a business, since one of the most popular benefits is a higher pension contribution.
But for employees to get the most out of it as a benefit, employers need to make sure they know what they’re offering. For example, 41% of employees didn’t know that their employer put money into their pensions every month.