What is a salary sacrifice arrangement?
Salary sacrifice arrangements have long been a common part of an employee’s remuneration and benefits package. Such an arrangement involves an employee giving up part of his salary or bonus, in exchange for a non-cash benefit. The main advantage in a pension scheme context is that a significant amount of National Insurance Contributions (NICs) can be saved under salary sacrifice arrangements. A portion of salary is sacrificed at source and used to fund additional employer pension contributions. The sacrificed amount that is used to fund the additional contributions is not subject to NICs.
In order to reap the tax benefits of a reduced salary, there must be a permanent variation to the employee’s contract reducing his salary. Generally speaking, if the variation is for 12 months or longer it could be considered to be permanent. Until automatic enrolment was introduced, this was taken to mean that a salary sacrifice arrangement in relation to pension contributions would have to last for at least 12 months. This would mean that any employee who is automatically enrolled into a workplace pension scheme on a salary sacrifice basis would have to remain on his newly reduced salary for a period of 12 months, even if he subsequently opted out of the pension scheme.
Guidance from HMRC and TPR
HMRC has reviewed the way in which salary sacrifice is operated in relation to pension contributions. It has concluded that as pension contributions are tax exempt in any event, “even if a salary sacrifice arrangement relating to a workplace pension scheme provides for the remuneration to revert to a higher cash salary on request, the tax exemption on the employer's contributions will not be affected. Consequently, it is not necessary to stipulate a period for which the arrangement must be entered into or to set out 'lifestyle changes' in relation to salary sacrifice for the workplace pension scheme.” This has clarified that an employee who is automatically enrolled into a workplace pension scheme on a salary sacrifice basis could revert to his pre-sacrificed salary without any adverse consequences, if he chooses to opt out of the pension scheme before the typical 12 month period.
The Pensions Regulator has also issued guidance in the area of automatic enrolment and salary sacrifice. TPR’s Detailed Guidance for Employers (April 2014) states that “An employer may ask an eligible jobholder who must be automatically enrolled whether they want to be put into a salary sacrifice arrangement. However, active membership of a scheme cannot be dependent on whether the jobholder agrees to the arrangement. So, if the eligible jobholder declines to set up salary sacrifice, the employer must automatically enrol them in line with the automatic enrolment provisions with an alternative method of contribution deduction”.
Although auto-enrolment and salary sacrifice arrangements appear in some ways to be incompatible, it is clear that the two can both feature in an employee benefit package. Careful consideration should be given to how best to accommodate the two.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.