Salary Sacrifice

1
Salary Sacrifice

• Geraldine Egan
• UCU National Pensions Official
• Sept 07

2
Contractual change

• Your employer is proposing a change to your
  contract. To enable salary sacrifice to apply to
  the majority of its employees, with the right to
  opt out.
• It will provide you with a some increase in take
  home pay, have no affect on your pension and the
  employer will pay it in full
• It is a way that both you and they benefit from
  savings in national insurance contributions

3
Contractual change

• This can only occur by agreement with the
  recognised trade union who on behalf of members
  can agree (hence need for members agreement
  ballot)
• Individuals being asked to agree
• Imposition, the employer gives notice of
  imposition and change and the individuals do not
  object or if they do they exhaust internal
  procedures.
• UCU believes better to require negotiations with
  union

4
Warnings

• What do employees need to consider if they are
  thinking about entering into a salary sacrifice
  arrangement?
• When entering a salary sacrifice arrangement to
  replace part of cash pay with a benefit that is
  tax and / or NICs exempt it is essential to
  understand what the sacrifice will mean in
  practical terms. Employees should consider
  carefully the effect, or potential effect, that a
  reduction in their pay may have on
• their future right to the original (higher)
  cash salary
• any pension scheme being contributed to
• entitlement to Working Tax Credit or Child Tax
  Credit
• entitlement to State Pension or other benefits
  such as Statutory
• Maternity Pay

5
Second State Pension

• If your earnings are below 79 per week LEL no
  affect as would not qualify
• If between 79-91 (LEL and Primary Threshold) )
  whilst not actually paying NICs you are treated
  as if you are.
• If earning 4108 and 13,000 for 2SP treated as
  earning 13,000
• If earning between 13,000 and 34,840 (UEL) will
  suffer reduction from 2SP

6
Contribution-based benefits

• Your entitlement to contribution-based benefits
  is related to the amount of National Insurance
  Contributions you have paid
• Incapacity Benefit
• If your deductible earnings fall below the LEL,
  you may not be entitled to Incapacity Benefit.
  But, you may be entitled to Income Support based
  on incapacity, which is a means-tested benefit.
• Jobseekers Allowance (JSA) (contribution-based)
• If your deductible earnings fall below the LEL,
  you may not be entitled to any JSA
  (contribution-based), as this benefit is paid at
  a set amount which cannot be reduced. If you have
  not below this level, you will lose your
  entitlement to this benefit. You may still be
  able to claim JSA (income-based), which is a
  means-tested benefit.
• State Pension
• If you have not paid (or are not deemed to have
  paid) enough NICs on your income, you may have a
  reduced State Pension when you retire, or none at
  all. You should also consider if your State
  Second Pension could be affected (this is covered
  below under earnings-related benefits).

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Salary sacrifice and earnings-related benefits

• Your entitlement to earnings-related benefits is
  based on your level of earnings, not including
  any amount sacrificed in return for a National
  Insurance Contributions exempt benefit.
• Earnings-related benefits include
• Maternity Allowance (MA)
• If your cash earnings is below 30 per week on
  average you will lose your entitlement to MA. If
  your cash earnings is between 30 and 115 per
  week on average you may still be entitled to MA,
  but at a variable rate. If your average earnings
  are 115 a week or more you may receive the full
  standard amount of MA.
• State Second Pension
• The State Second Pension if after salary
  sacrifice your earnings are between 4524 and
  13,000 you will be treated as if you earned
  13,000. If you are not in a contracted out
  scheme it will affect your entitlement to State
  Second Pension. If you are in a contracted out
  scheme if may reduce the small build you might
  have in the State Second Pension.

8
Salary sacrifice and work-related payments

• Work-related payments are paid by your employer
  and are based on youraverage earnings over a
  fixed period before you begin to receive them. As
  sacrificed cash pay will not count as part of
  your average earning it may affect these payments
• Statutory Maternity Pay (SMP)
• If you fall below LEL you will lose your
  entitlement to SMP. You may qualify for Maternity
  Allowance, (an earnings related benefit)
• Even if you qualify for SMP the higher rate of
  the first 6 weeks might be affected if you are
  not covered by your employers maternity scheme.
• Statutory Sick Pay (SSP)
• If your earning fall below LEL you lose your
  right to SSP If this happens you may be covered
  by Income Support based on incapacity or
  Incapacity Benefit if you meet the qualifying
  conditions unless you are covered by your
  employers sick pay scheme

9
Salary Sacrifice and Tax Credits

• Working Tax Credit (WTC) and Child Tax Credit
  were introduced to help families on middle
  income. The WTC depends on number of hours you
  work, number of children and whether you pay
  childcare costs. Salary sacrifice will lower your
  earnings which may increase WTC.
• If you have childcare costs under the WTC, these
  will be reduced by the amount of these costs meet
  by the employer and therefore this element will
  go down.

10
Salary sacrifice and married womens allowance

• If your earning are reduced to below LEL 87 per
  week your contributions will cease. If you have 2
  years of these then you will automatically loss
  your right to pay these reduced rate.
• If your earnings fall between LEL and Primary
  threshold 100 you will be not pay contributions
  but will be credited as if you have, but as these
  are at reduced rate they will not count for
  benefit or pension purposes.
• If you are earning over you might like to
  consider cancelling your right and making full
  payment in your own right, but that will depend
  on your history and therefore its value to you

11
National Insurance savings

• If not contracted out (not in occupational
  pension scheme)
•  
• 2006/7
• Members                                   
  Employers
• Earnings pw                   
• First 97            nil                   
  First 97    nil
• 97 to 645        11                12.8 on
  all earning
• excess over 645    1
•  
• If contracted out (in occupational scheme like
  USS)
•  
• 2006/7
• Members                        Employers
• Earnings pw
• First 97             nil                First
  97         nil
•  97to 645         9.4            9.3 on all
  earnings
• excess over 645  1    

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Gains

• Employees then receive 9.4 on their part of the
  salary sacrifice and if in excess of 645 per
  week 1
• Employers receive 9.3 minus 6.35 pension cost
  gain only 2.95.

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UCU locally are requiring the employer to

• They are negotiating it with the branch
• The branch are taking steps to inform the members
  and take a position and the branch is going to
  ballot all members as it is a change of contract
  and will not go ahead with members agreement
• It does attempt to protect anyone likely to
  potentially suffer a loss.

14
How much will my take home pay increase

• These savings are based on NIC rates for
  2007/08
• NIC savings are smaller for higher earners
  because the rate at which NIC is paid reduces
  from 9.4 to 1 for earnings over the NIC Upper
  Earnings Limit (34,840 per annum for 2007/08).
  However, an announcement was made in the 2007
  Budget which confirmed that the Upper Earnings
  Limit will be raised significantly over the next
  couple of years such that with effect from April
  2009 the level at which employees will start
  paying the lower rate of NIC is expected to be
  43,000..

15
Protection

• Participation in PensionSMART would bring your
  Adjusted Salary to below the National Minimum
  Wage (therefore you are not eligible to
  participate)
• You are employed on a variable time contract or
• Your Adjusted Salary after taking into account
  PensionSMART would fall below the Lower Earnings
  Limit.
• If you fall into category b or c above and you
  wish to participate in PensionSMART you will need
  to complete an opt-in form.

16
Annual Decision

• You need to be able to change your mind on an
  annual base, at a set time
• You wish to have at least one month notice of the
  ability to change your mind either to opt in or
  out this notice to be via pay slips.
• Unless you experience one of the following
  lifestyle events

17
Life style experiences

• Birth/adoption of a child
• Divorce/separation
• Death of a partner
• Marriage/civil partnership
• Notification or commencement of maternity leave
• Return from maternity leave
• Commencement of or return from long term sickness
• Significant changes in working hours e.g. move
  from full-time to part-time
• Material changes in partners circumstances (e.g.
  redundancy)
• Commencement of or return from sabbatical or
  unpaid leave
• Commencement of or return from an overseas
  secondment
• Reaching State retirement age (currently 60 for
  women and 65 for men)
• Leaving the USS within three months of being
  auto-enrolled into the USS
• Change of grade
• Moving from a fixed term contract to a permanent
  contract
• Becoming eligible to join the USS
• In these cases you may opt in or out of salary
  sacrifice at a time other than the usual annual
  date. Should you wish to opt in or out you should
  contact the HR Department
• Branch attempt to have this open-ended,
  employers normally want within 30 days of the
  event.
• Branch to negotiate the life style changes and
  revision of individuals position.

18
Employer gains

• Branch to give considerations to whether or not
  to ask for the money to be earmarked for the
  benefit of staff or use in staff budget
• One institution in the sector using for pensions
  (supporting their staff pension)
• One institution earmarked for staff benefits
• Ask for employers gains to be transparent

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Information Sources

• Inland Revenue
• Salary sacrifice www.hmrc.gov.uk
• Tax Credit Helpline
• For more information about whether this would
  affect your tax credits please call 0845 300 3900
  between 8am and 8pm.
• State Pension Advice Helpline
• Visit www.thepensionservice.gov.uk for more
  information, or you can call The Pension Service
  Monday to Friday from 8.00am to 8.00pm on 0845 60
  60 265.
• Independent financial advice
• Visit IFA Promotion Ltd at www.unbiased.co.uk or
  call 0800 085 3250.
• UCU
• Salary sacrifice leaflet email
  pensions_at_ucu.org.uk