Shared Cost AVCs (Salary Sacrifice)
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Shared Cost AVCs
Shared Cost AVCs (SCAVCs) are a salary sacrifice arrangement which have been available since 1 April 2008.
If the employee's earnings are over the Lower Earnings Limit, and they participate in a SCAVCs, then they can lawfully avoid Income Tax and National Insurance contributions on the earnings sacrificed.
The employer can lawfully avoid National Insurance contributions on the SCAVC.
How SCAVCs work
The employer must have a policy allowing shared cost AVCs under Regulation 17 of the LGPS Regulations 2013.
The member must be issued with a new contract of employment stating the pensionable value of their SCAVCs.
The employer may stipulate a minimum contribution or variation in contribution in view of the cost of issuing a new contract.
For further details, please refer to the LGPC Salary Sacrifice SCAVCs and the LGPS.
The disadvantages of SCAVCs
If the member sacrifices too much salary, they may suffer an annual allowance or lifetime allowance charge. Members may also lose certain HMRC lifetime allowance protections if they contribute to a money purchase scheme.
If a member has taken a lump sum from an uncrystallised money purchase arrangement (an UFPLUS) they may be subject to a reduced annual allowance and may not benefit fully from a SCAVC.
If a member's SCAVCs take them below the lower earnings limit (LEL) it may undermine their state pension.
If SCAVCs take the member below their personal allowance they will no longer benefit from Income Tax relief.
The advantages of SCAVCs
The advantages for members are:
- The member may be able to reduce their income via a SCAVC to avoid paying upper rate income tax
- The member may be able to reduce their income via a SCAVC to avoid repaying a student loan or means tested benefits (e.g. child benefit)
- The member may also be able to reduce their income via a SCAVC to avoid a tapered annual allowance (the scaling down of high earners annual allowance)
The advantages for employers are:
- Lawfully avoid employer's National insurance contributions on SCAVCs
- The employer saves roughly 9% of the value of the SCAVC on an average earner (c£24k)
- Some SCAVC providers offer to pay a percentage of the SCAVC to the employer