If you are an employer that offers the Local Government Pension Scheme (LGPS), you will be aware that the LGPS rules allow employees to build up their pension benefits for retirement by paying Additional Voluntary Contributions (AVCs) by way of a tax free deduction through payroll. If an employee chooses to pay AVCs, they are invested separately from the main LGPS pension benefits and provide additional income upon retirement.
Although you will have employees paying AVCs, you may not know that the LGPS has a provision within its regulations to allow an employer to also contribute to an employee’s AVC arrangement. This is known as a ‘Shared Cost’ AVC (AVC Wise) which can be provided through a salary sacrifice arrangement. Our salary sacrifice AVC Wise product is called AVC Wise.
For employees, the advantage is that they will not pay tax or NICs on the amount salary sacrificed. As a result, AVC Wise Shared Cost AVC by means of a salary sacrifice arrangement provides an opportunity for employees to save NICs in addition to the usual tax savings, thus increasing take-home pay when compared to paying AVCs in the standard way. In addition, the employer will benefit from a reduction in Secondary (employer’s) Class 1 NICs that it is required to pay.
For example, if an employee is earning £25,000 a year, and agrees with their employer that they will sacrifice £1,200 of their salary, which the employer will put directly into the employee’s AVC fund, the employee saves an additional 12% (£144) as they do not pay NICs on the amount of the salary sacrifice. The employer will also benefit by saving 14.3% (£171.60) as a result of not paying employer NICs (13.8%) and apprenticeship levy. (0.5%).This makes it an attractive arrangement for both parties.
For 300 staff making AVC Wise contributions through a salary sacrifice at an average of £1,200 a year, the employer can save £51,480 per annum.
Operating an AVC Wise Shared Cost AVC by means of a salary sacrifice arrangement is growing in interest within the public sector and is not affected by the legislative changes relating to the withdrawal of tax and NICs advantages of certain benefits provided through salary sacrifice.
You don’t need to be concerned that it is complicated to set up or administratively burdensome as the entire process is supported for you through our fully managed solution.
PSTAX are the tax specialists for the public sector and have implemented the AVC Wise solution (AVC Wise) at other local authorities and other public sector organisations in conjunction with the LGPS AVC fund providers.
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