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Scottish Widows logo (a hooded woman) - with the caption 'Masterclass, Salary Sacrifice'

In this recorded MasterClass on salary sacrifice from July 2016, we’ll look at the advice opportunities and provide practical examples on topics including:

  • an introduction to salary sacrifice
  • the tax benefits for basic and higher rate taxpayers
  • employer savings
  • legal and contractual aspects.
  • Operator: Good day, ladies and gentleman, and welcome to the Scottish Widows Salary Sacrifice MasterClass. For your information today’s conference will be recorded. At this time, I would like to turn the conference over to your host Mr. Simon Harris. Please go ahead sir.

    Simon Harris: Thank you, Elaine. Good morning everybody and welcome to the Scottish Widows TechTalk MasterClass on Salary Exchange. Today I’m joined by Tom Coughlan and Chris Jones from the Scottish Widows Financial Planning team, who’ll shortly be taking us through the presentation, providing insight into an area which looked to be under threat in the lead up to the last budget but fortunately, for the time being, looks to be safe. Sandra Hogg, who manages the Financial Planning team, will also be highlighting where you can obtain additional information and support on this topic.

    Salary sacrifice, or salary exchange, is commonly used by employers and employees to take advantage of the favourable tax and National Insurance treatment available for both parties. Whilst there can be a number of circumstances where salary exchange is used, this morning we’ll be focussing in on its use in conjunction with pension contributions. The practise for employees to exchange part of their salary, and or bonus, in return for employer pension contributions is more and more popular. Some reports suggest around half of employers now offer salary exchange arrangements.

    This approach can be far more attractive than the employer making a direct pension contribution on his, her own behalf, particularly if the employer is prepared to increase their pension contribution by part or all of their National Insurance contribution saving. Additional attractions for employees using salary exchange include immediate higher additional rate tax relief on their pension contributions to contractual based arrangements such as personal pension, and where earnings exceed £100,000 the ability to efficiently recover some or all of the personal allowance where this has been phased out.

    Effective salary exchange requires careful planning, and this therefore offers a great opportunity for you to engage with employers to offer advice on the use of this facility and to demonstrate how both they and their employees can benefit. Whilst there are major benefits there are also areas where additional attention is necessary to avoid any detriment to the employee. During the presentation Chris and Tom, as well as covering the main advantages, will also highlight areas where additional planning is required.

    This morning’s presentation is scheduled to last for about 30 to 35 minutes, following which there will be time for any questions you may have, and questions may be posted online or we can take them over the phone. A recording will also be made available on the Scottish Widows Adviser Extranet should you wish to review the content once again. CPD certificates will also be issued following the call.

    I will now hand over to Tom Coughlan to start today’s presentation.

    Tom Coughlan: Thank you, Simon. Good morning everyone. Just to go through the content that we’re going to cover today.

    So we’ll have a brief look at the background to salary sacrifice, particularly the discussion around salary sacrifice in the first quarter of this year and the lead up to the budget. We’ll look at why salary sacrifice is beneficial: that all hinges on how the Income Tax and National Insurance system operates, so we’ll look at that too. And then we’ll look at some examples for basic rate tax payers, and also the savings for employers and how they can be handed on, or passed on, to the employee.

    I’ll look at some of the drawbacks as well, and then I’ll hand over to Chris to look at some of the legal aspects, particularly around smart schemes, and also then some examples for higher rate tax payers. And finally, just a quick look at the interaction between salary sacrifice and various other tax allowances such as the tapered annual allowance and the personal allowance.

    Just going back to the first quarter of this year, many people were anticipating a restriction, or possibly the removal, of salary sacrifice in the budget.

    As a tax planning scheme it’s always vulnerable to some kind of attack by the government. Fortunately for us it’s very difficult, because you can’t stop employees entering into an agreement with their employer. One approach might be to charge employer National Insurance on the employer contribution, but that would then impact on, not only those that use salary sacrifice, but those that don’t as well. So it might be a very difficult thing to restrict or withdraw. Fortunately, none of that happened, instead we had quite a positive endorsement of salary sacrifice by the government.

    So the quote, on the slide there is taken direct from the budget statement and that’s in the context of the previous paragraph which basically said there will be a review of salary sacrifice schemes generally, but excluded from that review are those forms of salary sacrifice mentioned. So, pensions saving, child care, and health related benefits, such as cycle to work, they will all continue to benefit from Income Tax and NIC benefits when provided through salary sacrifice. But all other forms of salary sacrifice will be consulted on, possibly with a view to restricting them.

    That was all before the EU Referendum so now with new personnel in the government this may change, but we won’t know more until we get to the next autumn statement, or possibly the next budget.

    So what is pension salary sacrifice, and why do employers use it? In its simplest form it is just an agreement to give up salary in exchange for an employer pension contribution. And the aim should always be to improve the employee’s financial position in one of two ways. So, either by increasing the pension funding - and that should be at no extra cost to the individual. Or, keep the pension funding constant, but increase the take home pay.

    Depending on the flexibility offered by the employer you may be able to offer some combination of those two. And there are also benefits available to the employer, and the employer can decide either to make some or all of that available to the employee.

    So as I said we’re just going to look at Income Tax and National Insurance, and we’ll do that before we move onto some salary sacrifice examples. So, Income Tax, as I’m sure you are aware, is a banded tax system. So for those who have the full personal allowance, the first £11,000 is tax free. Obviously those who go over £100,000 in terms of adjusting net income will see some of that reduce. But for those who have the full personal allowance will get that first £11,000 tax free.

    Now the next £32,000 is charged at the basic rate of 20%, and then up to £150,000 is charged at the higher rate of 40%. And then additional rate applies once you get over £150,000. National Insurance has some similarities, it’s also a banded system, but there are some differences. Income Tax is calculated on an annual basis, whereas National Insurance is calculated based on the weekly or monthly equivalents of the thresholds mentioned.

    The first £8,060 on current rates is free of National Insurance, £8,061 up to £43,000 that is charged at the top rate of National Insurance of 12%. And then once you go over £43,000 the rate drops to 2%.

    So what does that mean for a client earning £40,000? Well the first £11,000 is free of Income Tax. The rest suffers 20% Income Tax, and then in terms of National Insurance the first £8,060 is free of National Insurance - of course assuming that their earnings are spread equally over the year. And the rest of their earnings suffer 12% National Insurance.

    When we’re looking at salary sacrifice you’re always dealing with the top slice of earnings, and so if they were to sacrifice some of their salary you would be dealing with income that sits in the 20% Income Tax band and the 12% National Insurance band.So taking a slice of income of £5,882, 20% Income Tax against that would be £1,176, and 12% National Insurance would be £706. So out of that pre-tax salary of £5,882 we are left with £4,000 in terms of post-tax salary. And why I’ve chosen those figures should become apparent on the next slide.

    So we’re just going to look at some examples then. So the first example is using salary sacrifice to increase the pension contribution whilst keeping take home pay the same.

    The example is as on the previous slide, £40,000 salary and an employee paying a personal contribution themselves of £5,000 gross. So if you’re going to enter into a salary sacrifice agreement, then you need to know how much salary has to be sacrificed, and it’s not the gross contribution of £5,000, rather it is the gross amount of salary that would be required to give the employee that £4,000 that then they pay as a net contribution. That’s then grossed up to £5,000.

    So the table on the left hand side just shows the pre salary sacrifice position, gross salary is £40,000, and the Income Tax and NIC on that is as shown. That leaves net salary of £30,367, and they’re paying a personal contribution themselves of £4,000 net, so that can also be deducted. And that leaves them with take home pay of £26,367.

    The table on the right shows the post sacrifice position, so they’ve reduced their salary by that amount, £5,882, which takes their salary down to £34,118. The Income Tax and National Insurance on that is correspondingly lower, that leaves them with net salary of £26,367. There is no personal contribution to deduct this time because it’s now being paid as an employer contribution, and that leaves them with take home pay of £26,367.

    So as you can see the take home pay has remained the same but by sacrificing their correct amount of salary and ensuring that amount is paid as a pension contribution they’ve managed to enhance what is being paid into their pension by £882. And that is a 17.6% increase and there’s no cost to the employee anywhere else.

    The alternative route is to increase take home pay, but keep the pension contribution the same. So in this case the amount of salary that should be sacrificed is the amount of the gross contribution that the employee was previously paying. So that is £5,000. The table on the left is the same as on the previous slide, the important figure is the take home pay at the bottom, £26,367. But now they’ve entered into a salary sacrifice agreement, reduced their salary by £5,000, which the employer then pays directly.

    Income Tax and NIC’s on that are shown on the slide, and that takes their net salary down £26,967. Again, there’s no personal contribution so that figure is also their take home pay as well. So as you can see take home pay has been improved by £600 but the pension contribution has remained the same. That amounts to an increase of 12% and for a fair comparison I’ve based that 12% on the £5,000, the amount that was being paid originally to the pension.

    Ok, so which is better of those two routes? Enhancing the pension or enhancing take home pay? From a purely financial perspective, enhancing the pension would be better. This is because where you improve take home pay then that take home pay will suffer National Insurance, whereas the employer pension contribution will avoid that. As we said, enhancing the pension gives us an extra £882. Enhancing the take home pay gives us an extra £600.

    If the employer offers the flexibility there may be an option to split the difference between those two, so take half of the improvement to the pension, then the contribution becomes £5,441. And then the take home pay should improve half of the difference shown on the previous slide, so the take home pay should increase by £300. Whether that is available depends on the employer. And the improvement overall will be halfway between those two figures shown in the tables at the top there.

    Ok, so far we’ve just looked at sacrificing salary entirely from the basic rate band, in that case the improvements are as we said, 17.6% for the pension, 12% for the take home pay. If salary sacrifice crosses a tax band, or you’re sacrificing salary from a different tax band then the savings will be different, but the very simplistic example of sacrificing entirely within the basic rate band gives us those percentages at the top. And that is just the employee saving.

    The employer also benefits from salary sacrifice because their National Insurance bill is reduced as well. So what are the improvements above those percentages if the employer National Insurance saving is passed on as well? But before we do that just have a quick look at how employer National Insurance is calculated. This is quite similar to the employee in terms of the thresholds, so it starts £8,112, anything above that is taxed at 13.8%.

    So, just to give an example, an employee earning £50,000: the first £8,112 is free of National Insurance, and above that it is charged to National Insurance at 13.8%. And one of the crucial differences with employer National Insurance is there is no upper earnings limit that reduces the National Insurance rate to 2% or 3%, now you just pay 13.8% on everything above that threshold.

    So if an employee was to sacrifice a £2,000 worth of salary, which would be from the top slice of their earnings the employer National Insurance saving on that would be 13.8% or £276.

    Ok then, so following on from our earlier example, we’ll look at how much further the pension funding can be improved. So with a salary of £40,000 the original employee contribution was £5,000 gross. As we said the contribution can be taken from £5,000 to £5,882, which is 17.6%. But the employer National Insurance saving on that would be £812, 13.8% of £5,882. So by how much can we improve the amount being paid to the pension if none, half or all of that saving is passed from the employer to the employee.

    In the first column on the left, £812 is the employer NIC liability but that is retained entirely by the employer, so we’re stuck with our original percentage, the original improvement of 17.6%.

    Chris Jones: Sorry Tom to stop you but we’re getting lots of messages saying the sound has gone. Operator, can you check the lines to make sure we’re still live?

    Operator: The audio’s still feeding for the audio participants and it looks like it should also be feeding for the web cast.

    Chris Jones: 30 or 40 people are saying the sound’s gone on here. Ok, well we’ll carry on, sorry to interrupt you, Tom.

    Tom Coughlan: No that’s ok. The middle column shows the position where half of the employer NIC saving is retained, half of it is passed onto the employee, so our contribution goes from £5,882 up to £6,288. So that represents an improvement of 25.8% over the original contribution of £5,000. And in the final column a very generous employer passes on all of that employer NIC saving and that takes the contribution up to £6,694.

    So the overall increase from £5,000 is 33.9%. That’s a significant percentage, just in one year, but that taken say every year for 30 or 40 years plus the additional fund growth on those amounts could amount to a substantial increase in the eventual retirement fund. But even where just half of that saving gets passed on, as the middle column shows, the saving’s going to make a big difference to the eventual fund.

    So far we have focussed on the benefits, the benefits are all financial, but there are some drawbacks to using salary sacrifice. So the major one, obviously, is the reduced salary, so salary sacrifice has to involve an actual reduction to the salary, it can’t be a notional change, it has to be a real change reflected in the contract of employment. And obviously anything calculated with a reference to that salary could be affected.

    So, the ability to borrow, social security benefits, any employment benefits that are calculated as a percentage of your earnings such as bonuses and pay rises, etc. they could be affected.

    In practise a lot of lenders and employers will accept the higher notional salary for calculating those things, but obviously before an employee takes out a salary sacrifice agreement they would have to check that there aren't any detrimental effects in those areas. Another drawback which just reduces the flexibility of salary sacrifice and who it’s available to is the minimum wage and the National Insurance thresholds. So salary sacrifice can't reduced salary below the minimum wage threshold, one thing that this may prevent is catch up contributions later in the year.

    So towards the end of a tax year a client might ask if they can sacrifice a whole month’s salary to catch up on missed contributions, and for the majority of people they can’t do that because that would then cause them to go below the minimum wage. Obviously not everyone is affected by the minimum wage, directors aren’t, aren’t restricted, so may not be an issue for them, but again it can just reduce the flexibility of salary sacrifice for certain individuals.

    Also, salary sacrifice should not reduce salary below the NI thresholds, because there are no tax advantages, so very low earners are better off paying a direct contribution where they get 20% tax relief rather than giving up salary for an employer contribution. And the final drawback is around maternity leave, this is a drawback for the employer. Once a salary sacrifice agreement is setup the employer has to pay the full contributions during any paid maternity leave, so that’s something they want to consider or should look at before they setup these arrangements.

    That’s some of the financial benefits and also some of the drawbacks, I’ll now hand you over to Chris who’s going to look at some of the legal aspects.

    Chris Jones: Thank you, Tom. Good morning everyone, apologies for those who lost sound briefly there. The legal aspects. So fundamentally salary sacrifice is an agreement between the employer and employee to change their contract of employment, to swap one benefit for another. For new staff the salary sacrifice option can be written into the contract that they sign when they join, e.g., if an employer wants to pay contributions they will set it up on a salary sacrifice basis. For existing staff an amendment to the contract will normally be required where the employee will sign.

    To be effective the contract change must be agreed by both employer and employee. Of course, the employee can choose not to accept salary sacrifice. And very importantly the contract must be varied in advance of any payment changes, that’s one of the key requirements of HMRC for salary sacrifice to be effective.

    This may work for small employers, but for significant numbers a better approach may be to use a smart scheme. Smart schemes are often described as negative affirmation; silence is taken as consent. Employees are given a period of time to state they do not wish to have their contract amended to enable salary sacrifice. Those that don’t reply have agreed to a change. Using this method will often boost up the take up rate, and this method is often used by the large employers.

    Before automatic enrolment salary sacrifice of pension contributions was much more restrictive. Agreements had to be put in place for at least 12 months, opting in and out was not permitted, otherwise Heaton v Bell would apply. The Heaton v Bell case ruled that where employees could opt in and out at any point the pension benefits could become taxable. This restriction was incompatible with automatic enrolment rules. Automatic enrolment cannot be conditional on the use of salary sacrifice.

    If automatic enrolment was on the salary sacrifice basis, opt out under AE rules would mean opting out of salary sacrifice.

    For this reason, the rules allowing pensions and salary sacrifice were relaxed, exempting from the requirement that arrangements could not be entered into on a temporary or ad hoc basis. This allows, technically, opting in and out at any time, not just for automatic enrolment purposes. However, as normal, the key is there must be a formal change to the contract of employment and this must be done in advance.

    Whilst it’s technically possible to opt in one month and opt out the next month, you have to make sure your contracts are changed both times and it’s both done in advance of any changes to payments.

    I’m going to look at higher rate tax payers. Building on the graph that Tom showed earlier, once you get to the higher rate band of £43,000 the Income Tax rate goes up to 40%. However, the National Insurance rate goes down from 12% to 2%, so a significant drop. As you sacrifice the top slice of your salary that means you’ll be paying tax and National Insurance total of 42%, meaning you’re left with 58%. So, in this example, £13,793 of salary gives you £8,000 in your pocket.

    With higher rate tax payers because of the way higher rate tax reliefs are claimed on personal contributions, it’s much more difficult to compare on a like for like basis. But one method is to compare the take home pay received with the existing gross contributions, sacrificing an amount to match this. So for example, with someone on £80,000 currently paying a £10,000 gross contribution. So, as we saw there the amount of salary that was sacrificed was not £10,000 but £13,793, which is the gross salary required to raise £8,000 net contribution.

    So, let’s look at the pre-sacrifice, you pay an £8,000 contribution, that’s grossed up to £10,000, and then you receive £2,000 higher rate relief. Salary sacrifice means £13,793 goes into your pension, you receive exactly the same take home pay. So the overall position’s improved from £12,000 to £13,793, an enhancement of 14.9%. And this represents the maximum benefit for salary sacrifice with only employee National Insurance give up for a higher rate tax payer.

    However, most of the increase is due to the fact that the £2,000 tax reclaimed hasn’t been reinvested. This will often be the case. However, let’s take a look at a different example where the higher rate tax relief is maximised.

    So same situation, but this time they anticipate the repayment of the pension tax relief in advance and add that into the pension up front. So here the take home pay is exactly the same, however rather than having your tax reclaim, you put it into your pension in advance. Obviously the mechanism is still the same, you still have to reclaim it. So instead of paying £8,000, you pay £10,666 net. Why do you do that? Gives you a gross contribution of £13,333.

    Your repayment of £2,667 takes you back to where you were and takes the net contribution back down to £8,000. So by maximising the higher rate reliefs the gross contribution is now a lot higher at £13,333, instead of £10,000. However, it’s still less than £13,793 through salary sacrifice, shown in the previous example.

    So to summarise higher rate tax payers, higher rate tax payers benefit from smaller gains than basic rate tax payers. This is of course due to the lower rates of employee National Insurance contributions on income over £43,000. Higher rate tax payers can enhance contributions without recourse to salary sacrifice, and that’s by taking advantage of the repayment of higher rate relief to the individual, putting that into the pension rather than taking that as cash.

    However, salary sacrifice still has advantages, especially where the employer gives up at least part of their NIC saving, same as the examples Tom showed you for basic rate tax payers.

    I’m going to look at salary sacrifice for tapered annual allowance and personal allowance. Salary sacrifice has no effect on the important figure of tapered annual allowance, that is the adjusted income figure. Both are counted as employer contributions and simply added back to the definition of income. So you have a salary of £155,000, an employer contribution of £5,000, that gives you adjusted income of £160,000. If you do £10,000 by salary sacrifice, your salary reduces but your employer contribution increases by the £10,000 and you’re back exactly where you were, your adjusted income is £160,000.

    Salary sacrifice for pensions do matter for threshold income. So here someone with £105,000, if they had an existing salary sacrifice, and by existing salary sacrifice I mean before the tapered annual rules came into play in the July 15 budget, and that’s when the anti-avoidance around salary sacrifice came in. So those contributions for the purposes of threshold income are ignored.

    If you have a salary of £105,000 you ignore the salary sacrifice. Same person decided to do a salary sacrifice after the budget changes in July 15, and it is included back in. If we compare that with personal contributions, example there again. Personal contributions do reduce the threshold income. So here you make a personal pension contribution of £6,000, that does reduce your income below the threshold income here in this example.

    But this is just to illustrate the planning point, it’s very limited scope, you would need to carry forward to make a large enough contribution to bring adjusted income below £150,000 and threshold income below £110,000. Technically it’s possible to avoid the tapered annual allowance in this way, but very limited scope to use this in practise, perhaps would work for one or two years but only given in exactly the right circumstances.

    Salary sacrifice can be used, however, to reclaim the personal allowance. With the personal allowance we have another definition of income adjusted net income. Where adjusted net income is over £100,000, you start to lose your personal allowance, it goes down for £1 for every £2 of income above £100,000, down to zero when your income achieves £122,000 or more. But you can reclaim it either by using a personal pension contribution or by using salary sacrifice. So to keep the numbers relatively simple I’ll show you an example with using a personal contribution.

    You have a £110,000 taxable income, you pay a gross contribution of £10,000, so once it’s grossed up you’ll receive a total tax relief on that of £4,000. You’ll also get back £5,000 of your personal allowance, means you save 40% on that. So that’s another £2,000. So the effective rate of that is 60% with a £10,000 personal pension contribution has cost you £4,000.

    You can do the same thing with salary sacrifice, there’s no anti-avoidance measure and rate for this, and you will get a better outcome using the NI savings that we described in all the previous slides.

    And that is the end of TechTalk content, Sandra’s going to tell us about more support material available.

    Sandra Hogg: Thank you, Chris. I hope you found that useful, it’s clear that salary sacrifice can be very beneficial and it can lead to greater pension savings. For more information on this, and on all topics relating to corporate pension planning, please take a look at our website, the Scottish Widows Adviser site, at, and look under Financial Planning and then Pension Planning. You’ll see a range of material covering the basics, technical details, fact sheets, case studies, regular updates, and tools.

    Please also take a look at our June bumper edition of TechTalk, it’s under Financial Planning and Techtalk, on the Scottish Widows Adviser site.

    Our June edition covers a wide range of topics, including a useful article on salary sacrifice. And you can view all of our previous masterclasses and podcasts under Building Business on the Adviser hub, watch the TechTalk MasterClass webinar, again all from the Scottish Widows Adviser site. The recording of this masterclass will be available immediately after the event by clicking on the registration details, an edited version will be added to the Scottish Widows Adviser hub shortly afterwards. We will issue CPD certificates of attendance to you in the next few days.

    Thank you for listening, and I’ll now hand over to Elaine for any questions.

    Operator: Thank you. Ladies and gentleman, if you would like to ask a question via the audio please press the * or asterisk key followed by the digit 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered you may remove yourself from the queue by pressing *2. Once again, please press *1 to ask a question. We will pause for just a moment to allow everyone to signal.

    Chris Jones: Right, while you’re waiting a difficult one here from Claire, that’s the first question, so I’ll take that one. If you have a complex workforce and different types of contracts how would an employer implement salary exchange with a mixture of permanent, stop, start and zero hours’ employees? Yeah, potentially that will pose difficulties and it’s a question of how clever your legal team is. It’s perfectly possible to have one addendum amending all contracts but it might get quite complex or they might be able to do it very simply.

    The key point is; it has to be an effective change to that contract for each individual. So that might require three different changes for different types of employees or, as I say, you might be able to do that with one addendum or one smart scheme notification, or it might need multiple ones.

    Tom Coughlan: Ok, another question has come through the website. Do you have any idea of the typical or average action taken by employees in respect of their NI savings? I’ve seen both examples used, so, either increasing the pension contribution or increasing take home pay. Sorry, I misread the question, it said action taking by employers, in respect of that and not employees. I’ve seen all variations of that, so either the employer retaining it all themselves, or passing a part of it on, or making it all available.

    Any of those should be ok, I don’t reckon there’s a typical, but certainly a large percentage of employers at least retain some of that saving.

    Chris Jones: I’ll just take an easy one. Where are you broadcasting from? Just outside St Paul’s Cathedral. Another one, when you talk about new salary sacrifice not making a difference to threshold income, does this also include increment to existing salary sacrifice? That’s from Eileen, thank you for that question. As long as it’s done properly, you should start from the position where you were as at 7th of July 2015.

    So, that should be the contract position at that point, so if you do an increment after that point, if it’s done properly it should only be the increment that counts.

    Tom Coughlan: Ok, there’s a similar question for you, Chris. So what about bonus sacrifice arrangements, do they affect adjusted income, threshold income, in the same way?

    Chris Jones: Yeah, well the bonus either way that’s paid as cash or as an employer contribution will always count for adjusted income.

    Tom Coughlan: Yes, threshold income, that all comes down to whether it’s a new salary sacrifice or an existing, with bonus sacrifice it will, in most cases, tend to be a new salary sacrifice because you’re giving up the bonus shortly before it’s received. So in most cases it will make no difference, it will be added on either way, so I think bonus sacrifice is a little bit more clear cut. It will affect adjusted income, and then it will in all likelihood affect threshold income as well.

    So, there’s no real way of getting round it, the tapered annual allowance, by using bonus sacrifice.

    Chris Jones: Thanks for helping me out with one, Tom. Is there any benefit of salary sacrifice where the employer’s restricted to £10,000 pension contributions because of high earnings? So where the tapered annual allowance applies. Well you still only have £10,000 whether it’s an employer contribution or a personal contribution, and either way you do it, it’s going to affect your adjusted income so it wouldn’t make any difference whichever way you did it. You’d still have the tapered annual allowance issues, you’d still have your NI savings, but it doesn’t avoid the tapered annual allowance issue.

    Any more there, Tom?

    Tom Coughlan: Yes, there’s an auto enrolment question. So how would you deal with salary sacrifice where contributions are paid on qualified earnings? I think the important point there is that your qualifying earnings will be the post sacrifice earnings, that’s confirmed in the TPRs guidance on auto enrolment. So, salary sacrifice will reduce your qualifying earnings, potentially then reduces the percentage that is being paid as it is a percentage of a smaller amount. But then the increase you get because of the NI saving should be enough to offset that. Any more questions?

    Chris Jones: Thanks, yeah, just one here for you, Tom, if a director is taking a £8k salary and then dividend, does tapered annual allowance apply on any employer contributions, or I can take it. Yes, so the dividends took would be included and added on to their income, so if the dividends were significant and took you over the adjusted income so you had £150,000 of dividends on top of your £8k salary then yes it would, yes, tapered annual allowance would apply.

    Tom Coughlan: Ok, there’s another question, do you have a calculator that can describe the options and which are client friendly? We do have a salary sacrifice calculator, which is on the Scottish Widows Adviser Extranet, so I’d recommend you have a look at that. And if you have any questions about the outputs then you can always direct them towards us.

    Chris Jones: Yeah, one asking that salary exchange, just checking it does need a physical variation of contract. Yeah, my understanding is it still needs to be a change to their contract, and that’s still within the revenue guidance, because the AE change didn’t relax that, they just relaxed the 12 months rule, not that the sacrifice could be done without changing the contract. Can we just check, is there any question on the phone?

    Operator: Certainly. Ladies and gentleman, as a reminder to ask a question please press *1. We will take a question from Claire Blaymire of Sequence Financial Management. Please go ahead.

    Claire Blaymire: Hi, I was the one with complex workforce question.

    Chris Jones: Thank you.

    Claire Blaymire: I was just wondering, when it comes to a workforce of that size, I’m on about a workforce of about 1400 people across 14 different sites, so it’s not an easy one. They have a lot of stop, start workers, and zero hours, when it comes to varying their contracts I’ve seen it where salary exchange is created as pound amount. But I suppose in cases like that it would need to be a percentage sacrifice?

    Chris Jones: Yeah, so, yeah you could do it that way instead, yes, definitely. And it’s just making sure that the contract is definitely changed, and that’s what all HMRC will be looking at, when they’re checking it, if they check it.

    Claire Blaymire: If they check it.

    Tom Coughlan: So you mentioned either the monetary amount or the percentage, I think if you’re dealing with earnings that are very uncertain and are ad hoc then a percentage might be a better way of doing it, or you could end up in a situation where the monetary amount sacrificed is more than the amount that they’re being paid.

    Claire Blaymire: Exactly, yeah.

    Tom Coughlan: A percentage would overcome that problem, but that doesn’t mean you can’t use the monetary amount, it’s just trying to think forward what the possible problems might be and that might be a more preferential way of getting there potentially.

    Claire Blaymire: No, definitely. The other side of the question that I had was where the ethics lie with regards employers passing back the NIC savings.

    Tom Coughlan: We’ve had the question earlier, a few times over the website as well. It is a difficult one, I have come across a lot of employers who do retain the full employer NIC, I can’t see a major problem with it because the employee should still be getting a financial benefit just because of their own NICs savings. So the employer isn’t detrimenting the employee by retaining that saving themselves, but obviously it’s preferable and it will encourage the uptake if they do offer at least a part of that saving.

    But I don’t think there’s any moral or ethical issue, the employee doesn’t have to take up the salary sacrifice. It’s a cost saving exercise, and I think they’re more than entitled to savings if they choose.

    Claire Blaymire: Ok, thank you.

    Tom Coughlan: All right.

    Chris Jones: Thanks for your question. Ok, I think we’ve covered most of them, there might be a few we’ve missed. If we have missed any I’ll get the details and get back to you individually because we’ve got all your email address. But thanks very much for everyone’s questions, again, sorry about the sound issues there.

    Tom Coughlan: Thank you.

    Simon Harris: Ok, thank you to Tom and Chris fielding all those questions. I think what we have seen through the presentation is that contributions paid out of an employee’s after tax pay are often less attractive as the employee and his, or her, employer will haven’t paid National Insurance contributions on the gross income received. If instead an employer’s able to agree with their employee to exchange salary bonus equivalent to the desired pension contribution there can be clear advantage to both the employer and to the employee.

    This is especially the case where the employer rebates some or all of their National Insurance saving. As advisers, you’re well placed to support all parties who are interested in this approach. Scottish Widows is well placed to support all these areas as well, Sandra has mentioned the TechTalk articles and updates that are available from the extranet. And there are also various guides and support available for advisers and employees, as well as the salary exchange calculator which sits on the adviser extranet.

    Please speak to your Scottish Widows contact if you would like further information about any of these. I appreciate today that some of you may have been impacted a few technical problems we’re having with the sound and apologise for that.

    However, as Sandra’s already mentioned, as with previous MasterClasses a recording will be placed on the extranet for further review. And indeed if you wish to review any of the other recordings that are still available on the extranet, as a reminder, CPD certificates will also be issued. So, finally, my thanks to Chris, Tom and Sandra, today, for taking us through the slides. And thank you for joining and that concludes today’s presentation.

    Operator: Thank you. Ladies and gentleman, that will conclude today’s conference call. Thank you for your participation, you may now disconnect.

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