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Reducing salary, maintaining pension contribution, increasing take-home pay

Yep, we are talking salary sacrifice (or salary exchange, to use the modern parlance). 

Piggybank

Many of us will have received our first payslip of the new tax year and seen a reduction in our take-home pay, and many finance directors will have seen an increase in their employment costs.  Quite simply, the main national insurance rates have gone up to 15.05% for employers and 13.25% for employees.

Yet typically, employee pension contributions continue to be deducted from post NIC-paid wages, retained by the employer before being sent to the pension provider along with the employer contribution.  It does not have to be that way.

Could reducing salaries be a win win for both employees and employers?

Employees and employers

With the cost of living rising rapidly, especially in respect of essential items such as food and utilities, a straightforward way of mitigating some of this increase would be for the employer to pick up the tab of the employee pension contributions, but with a corresponding decrease in salary as compensation.

Or putting it another way, for every £100 per month of an employee’s pension contribution obligation transferred to the employer, the employee sees an increase in their take home pay of up to £13.25, and the employer sees a reduction of £15.05 in their employment costs.  

The below Salary Exchange example may help:

Salary £24,000, employee pension contribution 5% gross (4% net), employer contribution 3%*

Employee  
 Before Salary ExchangeAfter Salary Exchange
Gross Salary£24,000£22,800
Income Tax£2,286£2,046
NI Contribution£1,870.90£1,711.90
Net Annual Pension Contribution£960.00£0.00
Net Pay£18,883.10£19,042.10
   
Employer  
Gross Salary£24,000.00£22,800.00
NI Contribution£2,242.45£2,061.85
Pension Contribution£720.00£1,920
Employment Cost£26,962.45£26,781.85
   
Pension Contribution  
Employee£1,200£0.00
Employer£720.00£1,920
Total£1,920£1,920

*Based on tax and NI rates for 2022-23

There is a process to go through to implement a salary exchange scheme and it may not be for everybody, but for the majority of employers and staff it is a win win.

If you would like to discuss how this might benefit your business and employees, please contact me on 020 7465 1949 or your usual MWM contact.


Disclaimer:

The information provided is for general information only and is not intended to address the particular requirements of an individual or business.  It does not constitute any form of advice or recommendation by MWM Employee Benefits or Menzies Wealth Management Ltd and should not be relied upon by individuals in either making or refraining from making any financial decisions. Where necessary, you should seek appropriate professional advice before acting on any of the information provided.

MWM Employee Benefits is an authorised representative of Menzies Wealth Management who is regulated and authorised by the Financial Conduct Authority (FRN 486548).

Menzies Wealth Management Limited is registered in England and Wales under number 06597008. Our registered office is at 1st Floor, Midas House, Goldsworth Road, Woking, Surrey GU21 6LQ. 

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