Salary Sacrifice and Pension Contributions

20th February, 2020

  • Earlier this month, the Government published its response to a wide-ranging consultation on the National Minimum Wage (NMW). This response is very relevant to workplace pensions because it covers the NMW and salary sacrifice, including pensions salary sacrifice (where employees give up part of their pay in return for a pension contribution from their employer).

    Addressing the anomaly

    For most people, salary sacrifice is the most effective way to contribute to a pension arrangement from both a tax and National Insurance Contribution (NIC) perspective, especially if the employer passes on any of its NIC savings.

    However, whilst an individual can agree to pay contributions directly to a pension arrangement even where doing so would reduce their pay below the NMW, this is not permissible via salary sacrifice. Consequently, employers have withdrawn salary sacrifice schemes or set thresholds for salary sacrifice that mean lots of employees cannot participate even if they would get a better outcome than they would by paying contributions by deduction from earnings.

    Whilst not creating a level playing field for direct contributions and salary sacrifice, the Government is going to take some steps to address the current anomaly. In particular, in its response, it has promised to:

    1. Improve NMW guidance available through GOV.UK; and
    2. Waive financial penalties for employers for certain breaches of rules relating to salary sacrifice and pay deductions (subject to eligibility criteria).Under these limited circumstances, employers will also be exempt from the NMW Naming Scheme.

    Unfortunately, “to maintain the integrity of the NMW rules, and to protect workers from accepting pay below the NMW”, the government will not amend the Regulations relating to pay deductions and salary sacrifice.

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    There is a second reason for highlighting salary sacrifice and pension contributions; viz, the forthcoming Budget (which has now been confirmed for 11 March).

    The issue of wholesale reform of pensions tax relief has raised its head again, along with the possibility of the introduction of a single rate of pensions tax relief in lieu of the current system of marginal rate relief.

    If marginal rate relief is abolished then presumably so will salary sacrifice for pension contributions.

    However, what about existing salary sacrifice schemes that may have been in place for years? Would / could the Government interfere with existing contractual agreements between employers and their workers?

    • Trustees who operate salary sacrifice arrangements need to be aware of these issues, have early discussion with their sponsoring employers payroll departments and consider member communications where appropriate.
    • If Trustees are aware of sponsoring employers who are, or maybe should be, considering setting up salary sacrifice arrangements then an early discussion should be arranged.
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