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Pension Salary Sacrifice: Worthy of Recommendation?

By Chieu Cao, CEO of Mintago

Small and Medium Enterprises (SMEs) are incredibly valuable assets to the UK economy. After all, they account for 99.9% of the UK’s private sector, contributing 51.9% of sector turnover.

However, such organisations have faced an incredibly challenging time throughout the previous two years. Complications which arose throughout Brexit and the COVID-19 pandemic place a strain on their finances, which in turn, jeopardised their survival. Indeed, in Q2 and Q3 2021, it was reposted that 24,960 more SMEs closed than opened.

Adding to this financial pressure is the looming 1.25% increase to national insurance (NI) payments, which is due to come into effect in April 2022.

Under such volatile circumstances, SME business owners must use every tool at their disposal to ensure that their finances are being managed as efficiently as possible. With this in mind, advisers to business owners would be wise to make their business owning clients aware of all options available to them. And such an option to be explored is the government approved Salary Sacrifice Pension Scheme (SSPS).

What is the SSPS?

Put simply, the SSPS is a scheme which allows employees to reduce their gross earnings by a predetermined amount and, in exchange, their employer pays the equivalent sum into their workplace pension.

In adopting this scheme (and it can be done without changing the existing workplace pension provider), business owners will be able to lower their national insurance tax bill. This is because employer pension contributions are considered to be an allowable business expense. Consequently, they are not liable for employer national insurance contributions.

Employees will also benefit from businesses adopting the SSPS, as they too will enjoy a reduced tax and national insurance bill. As such, they will ultimately see an increase in take-home pay, whilst strengthening their future financial position for when they retire.

Given the opportunities the scheme offers employers and employees alike substantial tax savings, one would assume that it would be widely adopted by SMEs across the UK. However, this is not the case. Indeed, a recent survey amongst 365 decision makers within UK businesses, just 33% of companies actually use the scheme.

Clearly, there are issues which are preventing businesses from adopting this lucrative scheme.

A lack of awareness

One of the leading barriers for SMEs when it comes to adopting the SSPS appears to be a distinct lack of knowledge about it. Indeed, Mintago’s aforementioned research revealed that the majority (54%) of UK business leaders are simply unaware of the scheme and how it works.

Failure to effectively understand the SSPS scheme could ultimately feed into wider misconceptions, such as that it will be costly and require a great deal of resources to implement it into an organisations’ existing operations and educate employees.

Of course the onus lies, in part, with the government, who must do more to educate business leaders about the scheme. That said, advisers could also take a leading role in educating business-owning clients about the SSPS, and the benefits it could offer the business.

The role of advisers

Of course, the goal of any adviser is to secure the best possible outcome for their clients. As such, it is the duty of advisers to make their business-owning clients aware of the scheme. Even though clients may initially consider it too complex, advisers must do what they can to simplify it.

For example, ensuring that the details of the scheme itself are clearly laid out, in jargon-free language, for clients to review. This will help to eradicate the misconception that the SSPS is too complicated. After all, the easier it is for individuals to understand, the more likely they are to adopt it.

Additionally, advisers should show clients exactly how much money they could save by adopting the SSPS. Such calculations can help the client to visualise exactly how the scheme could impact their business and act as a positive call to action to further explore and ultimately adopt the scheme.

Finally, advisers should ensure that clients have access to the right tools, to help them implement the scheme as efficiently as possible. For example, platforms like Mintago are easily accessible and take on as much of the legwork as possible, so the SSPS can be adopted whilst minimising any potential disruption for the business itself. Being aware of such tools could certainly prove invaluable to clients and persuade them to adopt the scheme.

SMEs have much to gain from adopting the SSPS; from benefiting their employees’ future finances, to substantially reducing their tax bill. However, this is a moot point if they are unaware of the scheme. As such, it is vital that advisers do what they can to promote the scheme and point clients in the direction of certain tools which can simplify the implementation process. And in doing so, SMEs will enjoy stronger financial health in the years to come.

Chieu Cao is CEO of Mintago. Mintago is an FCA regulated financial wellbeing company that helps find lost pensions quickly and provides financial planning tools, supported by over 1,000 pieces of informative content and tips about various aspects of their personal finances for its users. Mintago also helps businesses and employees save money via HMRC’s salary sacrifice pension scheme. Mintago provides a salary sacrifice pension hassle-free implementation program, which creates direct savings on monthly National Insurance payments, with a platform that simplifies managing employee pension contributions.

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