Salary Sacrifice question

JoeCrystal

badmemory said: 

This is the bit I never like.  Or does the employer actually pay into the pension on all income it is just the employee who doesn't?  In which case nice one!

I wish! It was based on the entire income, but alas, it was changed over to qualifying earnings with us paying 5% and the employer paying 3% of the qualifying earnings. I am looking forward to seeing the qualifying earnings abolished in the future hopefully.

Paul_Herring

badmemory said:

JoeCrystal said:

 above the lower qualifying earnings limit is taken into account for the pension contribution.

This is the bit I never like.  Or does the employer actually pay into the pension on all income it is just the employee who doesn't?  In which case nice one!

That is a minimum requirement for the employer. And it's the calculation for employer contributions.

More enlightened employers do it on all income, to the point where some even ignore the upper limit as well.

Regarding the employee contribution, the employee is more than welcome to up their "percentage" to make it as if it was on all wages if the employer is only basing their contribution on wages within the band.

bowlhead99

Paul_Herring said:

badmemory said:

JoeCrystal said:

 above the lower qualifying earnings limit is taken into account for the pension contribution.

This is the bit I never like.  Or does the employer actually pay into the pension on all income it is just the employee who doesn't?  In which case nice one!

That is a minimum requirement for the employer. And it's the calculation for employer contributions.

More enlightened employers do it on all income, to the point where some even ignore the upper limit as well.

Regarding the employee contribution, the employee is more than welcome to up their "percentage" to make it as if it was on all wages if the employer is only basing their contribution on wages within the band.

The employer will put in the amount it's agreed to put in, with the legal requirement as a minimum. The basis will of course differ from place to place.

While obviously it makes sense to help employer and employee avoid as much tax at possible, some employees care more about headline salary than how much pension they're efficiently building up. That's the whole reason govt introduced automatic enrollment. 

If the employer is out in the recruiting market and the says they will pay pension on an extra £500 of salary (e.g. divert 5% of the £500 into the pension pot instead of salary, on which which they will save only 12.8% of the 5% of £500), it still costs them 87.2% of the 5%. The prospective employee would perhaps have preferred to get a salary that was higher by the 87.2% of the 5% and also not need to have to put 3% of the £500 into a pension scheme themselves, even if it's tax efficient to do so. As building up a better retirement fund doesn't help you pay rent or mortgage or cover the costs of the lifestyle they want.

It's all very well wanting to be as tax efficient at possible but it doesn't mean that the more enlightened employers will spend more of their staff costs budget on better default pension contributions for all instead of using the net cost of doing that to fund better salaries.

Over a decade ago when my employer at the time spun out from a bigger organisation to create a 20-odd person start-up, they decided to drop the employer contributions from 15% to 5% and use the difference to pay better salaries to help attract the talent they needed. Mostly these were young professionals who were graduates working in the financial services sector so should 'get' the concept of a pension. But the competition was other financial services firms offering good salary and bonus prospects. The strategy worked out fine and employee numbers grew over tenfold in the years to come.

So an 'enlightened' employer will use its limited budget to fund the net costs of whatever compensation structure will best satisfy its current and prospective employees, whether it is 'efficient' or not.

For example, I might make a charitable contribution of £100 to support some cause. If I check the gift aid box the charity gets more money and I claim back some higher rate tax. So, no-brainer to check the box. It's efficient. Should I instead give £200? That's even more efficient as the government takes less tax from me and gives more to the charity, win win? But if I give the extra £100 it still costs me more money than if I hadn't done it. So I may not do it, as I have limited resources and might want to deploy them in other ways. 

Employers make those sort of decisions all the time. Offering a standard pension contribution on a greater proportion of salary costs more money than not doing so, so isn't done by all 'enlightened' employers. It depends what they think the employees might want.