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Salary Sacrifice in the Charity Sector

15th November 2016 by Gareth Hopkins

Salary sacrifice, or as I prefer, salary exchange, is the single biggest win:win employee benefit an organisation can offer. However, there is a particularly interesting moral argument to be had – specific to the charitable sector. Before we engage in ethical debate, I should warrant my chosen definition of ‘salary exchange’.

‘Sacrifice’ is such an awful term, not least because the literal definition is: ‘an act of slaughtering an animal or person or surrendering a possession as an offering to a deity’1 I am fairly certain salary exchange is areligious. In any case, no one is sacrificing anything; the process is simply the exchange of salary for a non cash benefit of equal value – pension contributions, for example.

Both employee and employer generate savings as a result of salary exchange as National Insurance (NI) contributions are deducted on the reduced salary – not the proportion of salary that is exchanged for pension contributions. Rather than to provide an education in salary exchange, this article will focus on a more contentious issue – the redistribution of employer NI savings.

GJH Pensions are noticing a trend whereby the third sector, more than any other sector, are sharing employer NI savings with their employees. On the face of it, such practice seems an excellent way to leverage pension provision in the workplace; but is such generosity truly justified? Through salary exchange, staff already benefit from reduced employee NI contributions, as well as contributions from the government in the form of tax relief (and generous matching/non-contributory arrangements in some cases). So, if not to the employee, where should employer NI savings go?

The obvious answer would be that employer NI savings should be re-invested into the charitable cause. With media scrutiny as to where donor money is spent, and a particular focus on pension expenditure, it seems brave (in absence of a better word) to deprive beneficiaries from this pension related income stream. Employer NI savings should be viewed as ‘organic fundraising’, if you will. 

Like corporations, the charity sector has shareholders – their donors; and every decision must be made with the shareholder in mind. In the private sector, employer NI savings equates to an increase in profit (sharing savings with employees is a rarity); in the charity sector, employer NI savings should equate to an increased income for beneficiaries (not an increase in employee remuneration).

Undoubtedly this article will prompt debate but, before the conversation (rant) begins, I should be explicit with what I am trying to achieve. This article is not promoting a ‘race to the bottom’ philosophy, nor am I suggesting the practice of sharing employer NI contributions is wrong. The purpose can be summed up, below. 

Charities spend a lot of shareholder money on pensions – this is a great opportunity to give something back.

Gareth Hopkins is Director at GJH Pensions. To keep up to date with all the latest GJH Pensions news you can subscribe to our newsletter here or follow us via twitter @GJHPensions. GJH Pensions are an independent consultancy offering practical solutions to all things pensions. Our industry expertise, and personal approach, means we can truly understand the bespoke requirements for each client. Contact GJH Pensions today for a free consultation on 07446 148 537 or email gareth.hopkins@gjhpensions.com.