Salary Sacrifice Pensions – Why you should do it and why you should be careful?

We have seen several umbrella companies of late promoting salary sacrifice pensions to contractors. There are lots of advantages to contractors for opting into a salary sacrifice pension, but with some important considerations. In this article we will detail what a salary sacrifice pension is, the benefits, and our findings following the auditing of hundreds of contractors’ payslips via not-for-profit site Contractor Voice. 

  1. What is a Salary Sacrifice Pension? 
  2. How does Salary Sacrifice benefit contractors? 
  3. What the results of hundreds of payslip audits show 
  4. Parasol example
  5. What does the industry think?
  1. What is a Salary Sacrifice Pension? 

A salary sacrifice pension contribution is an arrangement where an employee agrees to give up part of their salary in exchange for increased employer contributions to their pension fund. For more information, click here.

It provides tax advantages for both the employee and the employer, as the sacrificed salary is not subject to income tax nor employer or employee National Insurance Contributions (NIC).

2. How does Salary Sacrifice benefit contractors 

  • Tax savings: The employee pays less income tax and NICs because of the reduced taxable income. 
  • Increased retirement savings: By sacrificing a portion of their salary, employees can potentially increase their retirement savings, helping to ensure a more secure financial future during retirement. 

Considerations for contractors: 

  • Reduced disposable income. 
  • Potentially reduced available credit, such as for a mortgage

You should always seek independent advice from a qualified financial advisor 

3. What the results of hundreds of payslip audits show 

Since November, following the Orange Genie exposé, Contractor Voice has been using SafeRec to audits hundreds of payslips issued by dozens of umbrella companies and discovered that the way pension deductions are treated varies from company to company.

In the audits, we discovered that umbrella companies calculate employment costs differently when a contractor has opted into a salary sacrifice pension and contributions are detailed differently on the payslips.  Some umbrella companies are calculating Employer NIC on the salary sacrifice pension contribution but without a pension statement, a contractor will not know if this deduction is being contributed to the pension or added to the umbrella’s top line. 

The Salary Sacrifice is normally not subject to employment costs.  

The main difference is in traditional permanent employment, a saving is being made on employer NIC. However, for an umbrella company any saving on employer’s NIC that is not passed onto the contractor, becomes a profit on top of their margin – in other words, funds sent by the recruitment agency that does not end up in the candidate’s pocket. 

Even if legal, it raises the ethical question – should the umbrella company benefit from the reduced employment cost, retaining the difference?

4. Parasol example

To give one example for now, apparently without prior consultation and approval from its umbrella employees, from the 1st of July Parasol have made the decision to reduce the amount of private pension contribution that they are contributing to contractor’s pensions. Contractor Voice has been contacted by several contractors who have stated that “Parasol have started contributing 3.5% less to the [contractor’s] salary sacrifice pension without formal communication of the changes” and without detailing any difference on the contractor payslips. This means that whilst Parasol use to contribute all of the employer NI saving into the contractor’s pension, the company have since decided to deduct an additional 3.5% which is retained by Parasol and equivalent to circa £120 per month for one contractor – no doubt many of these contractors will have opted to work with Parasol believing that all of the employers NI saving will be contributed to their pension and are unaware of the changes.

Sam Williams, (Chartered FCSI, DipPFS) commented that, “When increasing the level of salary sacrifice into your Pension, this not only reduces your Tax & National Insurance liability, but it also reduces your employer’s National Insurance liability.” He went on to highlight that “you can often negotiate to have the employers National Insurance saving passed on to you as an additional Pension contribution each month. This can make a huge difference to the value of your Pension over time due to compounding returns on monies invested.”

If NICs are correctly calculated after deduction of the salary sacrifice value, less is then paid to HMRC, which means the total of the ‘Employment Costs’ are reduced, and contractors will take home more or see more contributed to their pensions. Across the hundreds of payslips that we have audited, this is detailed in different ways, and we urge any contractors to upload their payslips via our website for auditing. It is also important for contractors to ask the details of any pension arrangements with their chosen umbrella at the start of any assignments and regularly check their pension statements.

5. What does the industry think?

Thomas Wallace TEP ATT, Director of WTT Consulting, provided industry insight into the application of salary sacrifice pension contributions within the umbrella industry and the unique position contractors are in when engaging via an umbrella company. He commented that salary sacrifice pension schemes are efficient tax planning tools and provide legitimate tax savings within the tax legislation for employers and employees.” He went on to detail the difference to traditional employment, highlighting that “umbrella employees, however, have a unique situation where their assignment rate is used to pay all employment costs. The question is therefore whether any saving should be passed back to the contractor, or if not, greater transparency is required around the true margin charged by the umbrella so that meaningful like-for-like comparisons can be made when contractors and agencies are choosing who to work with.”

There is no doubt that it is another example that shows that regulation is needed in the umbrella industry defining the treatment of certain arrangements. Like many of the regularly discussed topics surrounding employee benefits and employer responsibilities, salary sacrifice pensions are another fantastic arrangement that benefit both parties in a traditional employment arrangement; however, create an opportunity for umbrella companies to increase their revenue on top of their margin if savings are not passed on.

We are interested to learn of the industry’s thoughts on Salary Sacrifice Pensions and who should benefit from the reduced Employers NI. What do you think about this practice?