With the new fiscal year kicking in, this week marks the introduction of some changes. Below Lawyer Monthly hears from Paul Falvey, tax partner at accountancy and business advisory firm BDO LLP, who comments on the pension/auto-enrolments dynamic.
As of yesterday, 5 April, many employers will be hit by significant cost increases. Firstly, minimum wage rates will increase depending on the age of the employee and secondly, auto-enrolment pension contributions are set to double.
Unless employees have opted out of the auto-enrolment scheme, and assuming the employer doesn’t voluntarily pay a higher percentage, they will see their pension contributions rise from 1% to 3% of salary with employer’s minimum contributions rising from 1% to 2%.
Auto-enrolment was introduced partly to make it easier for employees to join a work place pension scheme and partly to make pensions more financially attractive by making it compulsory for employers to pay into eligible workers’ pension schemes. However, there are inevitable costs for both employees and employers. Putting a salary exchange arrangement in place will help to reduce these costs. Through these arrangements employees agree to give up some salary or bonus to protect their net take-home pay. The amount given up is used by the employer to provide an alternative benefit, in this case an increased employer pension contribution. As the employee is being paid less gross salary, the employee makes National Insurance Contribution (NIC) savings (up to 12%). Employers will also save NIC, making it a win-win all round.