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Auto-Enrolement changes put pressure on small businesses

April 2019 saw the increase of minimum contributions to auto-enrolment pensions from 5 per cent of wages to 8 per cent. With employers now required to contribute 3 per cent, rather than their previous 1 per cent, the Federation for Small Businesses (FSB) has warned that this could put “substantial” pressure on small businesses.

The Institute of Fiscal Studies (IFS) has reported an increase of workplace pension participation amongst small business employees of around 45% as a result of auto-enrolment. That means that businesses who employ between 2 and 29 workers will be seeing a significant extra cost towards pension schemes. These costs aren’t necessarily as daunting for larger businesses, but in the words of Mike Cherry, National Chairman of the FSB, “The costs involved for smaller employers are substantial, in terms of both expenditure and indeed their time, as they have grappled with finding a good provider and setting up whole new systems. Now that the 3 per cent rate has hit, the burden will be greater still.”

But with 70 per cent of UK workers employed by small businesses now on workplace pensions as a direct result of auto-enrolment (first introduced in 2012), employees seem to consider it as an attractive prospect. They too have seen an increase in their minimum contributions, from 3 per cent to 5, and so sacrificing a higher portion of their monthly wages has been accepted as a move that does come with its own benefits. Predictions from investment firm Hargreaves Lansdown state that in real terms, the average employer will see £30 of their monthly wages go towards their pension pot which, on average, results in total pension savings increasing by around £55,000.

Employers, on average, are predicted to now contribute £55 a month to the average employee’s pension pot, an increase from the pre-April figure of £37. These increases aren’t all bad news for employers however; Guy Opperman, Minister of Pensions, sees them as the opposite. “Automatic enrolment has been an extraordinary success, transforming pension saving and improving the retirement prospects of more than 10 million workers already. The increased cost on employers has been phased in over time so firms have had the opportunity to adapt. Pension contributions are a valuable employee benefit which firms use to attract and retain good people. This is true of small and large firms alike.”

Sources
https://www.peoplemanagement.co.uk/news/articles/increased-auto-enrolment-controbutions-could-have-substantial-impact-smaller-employers
https://www.ifs.org.uk/publications/14012

Salary Sacrifice in 2 minutes

What is Salary Sacrifice?

Salary Sacrifice is the term given when an employee decides to forego part of their salary in exchange for other benefits.  Benefits taken in lieu of salary could include, childcare vouchers, loan repayments under the cycle to work scheme or, most commonly, employer pension contributions.  This fact sheet focuses on the benefits of sacrificing salary for pension benefits.

What are the tax advantages?

Employer pension contributions are made from gross salary so do not suffer either income tax or national insurance deductions.  The national insurance saving is made by both the employer and employee.  By contrast pension contributions made by the employee are made from net salary and although income tax relief is given, national insurance deductions cannot be reclaimed.

National Insurance contributions provide employees with valuable entitlements to state retirement benefits.  The earnings related component of the State Pension uses an earnings band of £5,044 to £40,040 but the top £3,835 of earnings generates no additional benefit to the individual.  If salary is sacrificed in favour of an employer paid pension contribution, the employee gains additional retirement benefits at no cost and the employer also reduces their national insurance bill.  Where the employer is prepared to pass on this saving to the employee, the pension contribution is given an additional boost.

For those with taxable income above £100,000 the tax benefits are even more compelling.  Where income exceeds £100,000 the personal allowance is reduced by £1 for every £2 of income above £100,000 resulting in an effective tax rate of 60%.  If, through the use of salary sacrifice, the personal allowance can be restored, 60% tax relief can be enjoyed.

How should arrangements be put in place?

Since salary sacrifice involves a variation of the employee’s terms of employments it is a matter for agreement between the employer and employee.  HMRC is only concerned that the correct amount of tax and National Insurance Contributions are paid in respect of each element of the remuneration package.  Care needs to be taken over the wording of the arrangements.  If the terms and conditions provide the right to revert to cash within the period of time they are set for, any tax exemption may be lost.

Next Steps

From an employer point of view, the reduction in the National Insurance burden is very appealing.  From an employee perspective salary sacrifice will not be suitable for all, but for many, it will be the most tax efficient way of making pension contributions.

Election Rivals Set Out Pension Promises

With the 6 May 2010 General Election fast approaching, below is a summary of how the rivals intend to deal with pensions, should they be elected.

Labour

  • Reduce tax relief for those earning more than £130,000.
  • Introduce employer duty to enrol staff into a pension scheme from 2012; known as auto-enrolment.
  • Review default retirement age of 65 for employees.
  • Restore state pension annual increases to earnings in 2012; currently increases in line with inflation.
  • Gradually increase State Pension Age to 68, starting from 2024.

Conservatives

  • When resources allow, start to reverse the effect of the decision in 1997 to abolition dividend tax credits for pension schemes.
  • Scrap the rule forcing policyholders to take their pensions before age 75.
  • Review the auto-enrolment rules.
  • Cap public sector pensions over £50,000.
  • Restore state pension annual increases to earnings before end of next parliament; currently increases in line with inflation.
  • Hold a review to bring forward the start date of current government’s plan to increase the State Pension Age from 2024 to 2016 (for men) and 2020 (for women).

Liberal Democrats

  • Scrap higher rate tax relief on pension contributions; basic rate only, regardless of earnings.
  • Give pension policyholders early access to their funds; currently earliest age is 55.
  • Scrap the rule forcing policyholders to take their pensions before age 75.
  • Scrap default retirement age of 65 for employees.
  • Replace state pension with a citizen’s pension, available to all at pension credit rate.
  • Immediately restore state pension annual increases to earnings; currently increases in line with inflation.
  • Retain current government’s plans to gradually increase State Pension Age to 68, starting from 2024.

Concept Financial Planning

Thanks to TPAS