Few RPs can claim not to have been affected by increasing costs and cuts in local government expenditure over the last year or so.
It is clear the Government is expecting to obtain more from the housing association sector but at much less overall cost. Fortunately, there is something that many registered providers (RPs) can do to increase people's take home pay without increasing their gross pay.
A large number of RPs have employees who participate in the Social Housing Pension Scheme (SHPS); typically, those earning £20,000 or more per annum. There is an opportunity to improve the take-home pay of these people and to reduce employment costs at the same time. This may be achieved where individuals elect to pay their pension contributions through "salary sacrifice", something that is commonly associated with defined contribution arrangements, rather than defined benefit schemes, such as SHPS.
Salary sacrifice – how it works
Employees give up ("sacrifice") part of their remuneration equal to the contribution they are already making (or wish to make) to the pension scheme. In return, the organisation pays an equivalent amount into the scheme alongside its "normal" contribution, so the total input to the scheme is unchanged.
In general, those paying tax at the basic rate will be liable for national insurance (NI) contributions at 12% and higher rate tax payers will usually fall within the 2% band. However, as SHPS is contracted out of the state second pension (S2P), NI rebates of 1.6% (employees) and 3.7% (employers) apply in respect of most basic rate tax payers. This means that a basic rate tax payer can expect to save 10.4% of the amount sacrificed and a higher rate tax payer, 2%. The employer also makes a worthwhile saving of 10.2% (earnings up to £40,040) or 13.9% (higher earners) of the amount sacrificed.
There are two important rules that must be observed, in order to meet HMRC's expectations.
- Salary must be sacrificed before the period in which it is earned.
- For such an arrangement to be regarded by HMRC as bona fide it must remain unchanged for at least a year after coming into effect and after any subsequent change. This is because it denotes a change to an individual's contract of employment. It is essential to have the right documentation in place, in association with a well-orchestrated communications programme. This is an area in which Smith & Williamson has considerable experience and can make a big difference to the successful implementation of salary sacrifice.
Following the recent "Revenue & Customs Brief 28/11", pensions are one of the few employee benefits which, when funded through salary sacrifice, will not attract VAT.
The Social Housing
Pension Scheme
The Pensions Trust will allow contributions to be paid to SHPS by salary sacrifice and by deduction from payroll, for different employees of the same organisation. This means that there is no requirement for all members to contribute in the same way. Two months' notice and the appropriate documentation needs to be completed, which is the last stage in the process, once employees have understood the implications of adopting salary sacrifice.
Aspects to consider
Contribution-based state benefits and some work-related payments may be affected by reducing the amount of income on which an employee pays NI contributions, although most people consider that the obvious advantages outweigh the potential disadvantages.
Minimum NI contributions
Most state benefits and work-related payments require earnings in excess of the lower earnings limit (currently £5,304 per annum) in order to qualify for them. These include such benefits as the employment and support allowance, jobseeker's allowance, statutory sick pay, statutory maternity pay and the state pension. It is not envisaged that low earners should consider salary sacrifice and to reduce pay below the lower earnings limit is not permitted.
Earnings-related state benefits
A handful of state benefits include an earnings-related element and the amount by which earnings are reduced to fund a pension will generally lead to either a small reduction in the benefit payable or none at all, depending on the level of a person's residual income. Since SHPS is contractedout of S2P, salary sacrifice has no impact.
Mortgages
Increasingly, mortgage lenders take into account net pay, when considering requests for loans. Pension contributions are likely therefore to be taken into account when assessing residual income. Where an existing pension contribution is exchanged for salary sacrifice, a person's net income will actually increase, so it should not adversely affect the availability of a mortgage. A few mortgage lenders will still consider gross pay, which may necessitate a letter from the employer confirming notional gross pay, before sacrifice.
Examples of potential savings
1) Individual earning £20,000 per annum and paying £1,000 per annum (5%) to SHPS.
Post salary sacrifice
Increase in net pay: £104 per annum
Saving to employer: £102 per annum
2) Individual earning £50,000 per annum and paying £2,500 per annum (5%) to SHPS.
Post salary sacrifice
Increase in net pay: £50 per annum
Saving to employer: £345 per annum
The higher earner would pay lower NI contributions on earnings up to £40,040, but the savings relate to earnings which fall outside this band. The employer will save the full 13.8%.
No SHPS members?
There has been a dramatic take-up of salary sacrifice arrangements in the last couple of years, across all sectors and industries. The facility to adopt salary sacrifice in association with SHPS is relatively unusual for this type of scheme but employers with defined contribution plans (e.g. group personal pensions) have been making great use of salary sacrifice, often sharing their NI saving with members by increasing the overall pension contribution.
Using the first example above, if the individual was not a member of SHPS, he or she would save £120 per annum and the employer would save £139 per annum. The corresponding figures for the higher earner would remain unchanged.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.