Let’s look at an example of how Smart Pay works in practice.
Contributions outside of Smart Pay
A member of the RSP earning £25,000 decides to contribute 6% to the RSP, but does this outside Smart Pay.
The reduction to take home pay is £100 per month after tax relief (£25,000 x 0.06 x 0.8 x 1/12), but the member pays NI on full earnings.
Contributions through Smart Pay
If same member decides to contribute 6% to the RSP but does this through Smart Pay.
His basic earnings are reduced by 6%, the “sacrifice”, which is £125 a month (£25,000 x 0.06 x 1/12).
Because basic earnings are £125 a month lower the member pays £25 less tax a month (£125 x 0.2).
In addition as basic earnings are £125 a month lower the member also pays lower NI. At this earnings level NI is charged at the rate of 12% for RSP members, which is equivalent to a reduction in NI of £15 a month (£125 x 0.12).
In summary by taking advantage of Smart Pay the actual cost of a 6% contribution is £85 a month (£125 (6% of basic earnings) less £25 (tax relief) less £15 (NI saving)).
So whilst the cost to the member is £85 a month the amount invested is £250 a month, which is made up of £125 salary sacrifice from the member and £125 matching contribution from IMI.