Registered Providers - Staff Engagement Without Increasing Pay

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...