An employer may offer its employees the option of salary sacrifice as part of their pension scheme. Through such an arrangement, an employee may agree to relinquish part of his or her salary, which the employer then pays into a pension scheme on the employee’s behalf.
Since the employee will be effectively earning a lower salary, both the employee and employer pay lower National Insurance Contributions (NICs). Better still, the employer may then also agree to pay part or all of their NIC savings into the pension, although this is strictly optional.
How to enter a salary sacrifice scheme in Voyant
To start, there is no need to make any adjustments to your client's earnings in order to account for the reduction in taxable earnings due to a salary sacrifice. Earnings should always be entered on the Employment screen as a gross amount, exclusive of any pension contributions and income taxes that may later be deducted by the software.
Pension contributions made via salary sacrifice are entered on the Pensions > Money Purchase screen.
1. Either select the appropriate pension in the ledger, to the right, or begin entering the details for a new pension.
2. Personal Contribution: Enter the full amount of the salary sacrifice.
3. Expand Advanced Settings > Contributions.
4. Tick "Contributions made through salary sacrifice".
When ticked, this setting will automatically deduct the sacrificed income (the amount you entered a moment ago in the Personal Contribution field) from your client's salary before calculating NIC, thereby reducing your client's NI contribution. For higher earners, the software will also deduct the sacrificed income before calculating a phasing out of the personal allowance.
The software will also calculate the employer's NI savings in order to potentially rebate it to the employee.
5. Employer NI Rebate: Specify the percentage of the employer's NI savings that will be rebated to the employee.
Any rebated NI savings will be paid by the employer into the pension.
6. Employee's NI Rate Code: Select the employee's NI rate code. This code will be used to calculate the employer's NI savings that may then be rebated to the employee as an additional pension contribution, based on the percentage entered above.
Additional employer contributions
Return to main section of the screen. Does the employer make any additional contributions to the pension apart from those made via salary sacrifice and if applicable, the NI savings rebate? Employer contributions can be scheduled independently from the salary sacrifice.
Employer Contribution: Click Yes if the employer does makes additional pension contributions, aside from the salary sacrifice or the NI savings rebate. These are contributions not deducted from the client’s annual income.
Specify whether these employer contributions are Matching those made by your client or are Fixed, meaning that they are made independently of any contributions made by your client.
If contributions are Matching:
% of Ind [Individual Contribution]: Specify the percentage of the employee’s contribution that the employer is willing to match. For example, enter 100% to indicate that one hundred per cent of John's contributions are matched by his company.
Up to % of Salary: As a percentage of income, what is the maximum amount the employer is willing to match. For example, enter 10% to indicate that your client’s company would match up to a maximum of 10% his salary.
If contributions are Fixed:
Enter the employer’s contributions either as a total annual amount or as a percentage of your client’s salary. For example, an entry of 10% would mean that the employer plans to contribute ten per cent of your client’s future salary to this pension.
Where to view details of the salary sacrifice contributions
Details of these contributions can be checked on the Let’s See charts.
Click on any bar/year of the chart during which pension contributions are to be made.
Click Detailed Info to view the figures behind the charts, which are arranged into a series of tabs.
Note that this tab shows the gross income, not a net figure reduced by the salary sacrifice.
The pension contribution scheduled via salary sacrifice will be shown as an “other” expense.
The National Insurance contribution, which should be reduced by the sacrifice made from your client’s earnings, will be shown as a tax expense.
The “Actual” contribution will show the amount that was contributed into the pension via salary sacrifice. The tax relief on personal contributions to non-occupational pensions will also be excluded from this total, effectively netting down the personal contribution by 20%.
“Unscheduled” contributions will show a total funds deposited into the pension from sources other than your client’s income or those made through salary sacrifice. This total may include funds deposited by the employer as an NI savings rebate and could include other employer contributions made apart from the salary sacrifice and NI savings rebate. The 20% tax relief on personal contributions to non-occupational pensions will also be included in this total.
The personal tax summary will show how contributions to occupational pensions are deducted from one’s taxable income.
The adjusted NIC will be shown in the “Other Taxes” total. Again, the exact NIC can be viewed as a separate tax on the Expenses tab.
First Published 09 November 2015, Release 4.0.27
Retirement Income (Webinar 2)