One of the “go-to” tools in the kit bag of any good Employment Tax advisor, pensions salary sacrifice is a great way to generate savings for both employer clients and their employees. But the practicalities of auto-enrolment and compliance with tax, National Insurance and National Minimum Wage legislation mean it is more important than ever that all aspects of the requirements are understood and communicated to clients.

At Dains we are actively speaking to our clients, especially given the hike in the minimum contribution level back in April 2019, with the employee contribution rising from 3% to 5%, where the employer opts to pay the minimum requirement. We have been surprised by the amount of employers that are still not utilising this opportunity. Responses to the question “why not?” illustrate both a misunderstanding of the operation, a consideration that the changes imposed by the Government from April 2017 have meant it is no longer viable and a general impression that any negative aspects outweigh the positive. So it’s clear, that, with any implementation, the tone and content of communication, both to clients employees and the staff who will be responsible for administering the arrangements, allow them to fully understand what the arrangements constitute, the benefits and risks, and the working structure.

What are the benefits?

The main benefit is a reduction in Class 1 National Insurance liabilities; 13.8% of the sacrifice value for the employer and the employee at their marginal rate, 12% or 2%. For those employers who are liable to the Apprenticeship Levy, as this charge is levied on salary costs that are subject to Class National Insurance, this value is reduced for any salary sacrifice applied, making employer savings a potential 14.3% of the salary forgone.

For an employer with 50 eligible employees, earning an average of £30,000 per annum and with pensionable pay set as all earnings, annual employer National Insurance savings of £10,350 can be generated (assuming employees are currently paying 5% of the required 8% contribution). An employee liable to National Insurance at 12% on the pay sacrificed will see an annual reduction in their liability of £180, equivalent to a gross pay rise of £264.

Ancillary impact on employee finances include:

• a reduction in the base pay on which student loan deductions become due. Some employees may consider this beneficial, from a short term perspective. Others may not wish to extend the life of the interest bearing loan

• a reduction in the value of income when assessing entitlement to Tax Credits and Universal Credit, increasing benefit entitlement

• a reduction in pay during the Qualifying Period, form which the calculation of average pay due for the first six weeks entitlement to Statutory Maternity Pay is calculated

• a reduction in entitlement to other National Insurance contributions based benefits

Appropriate planning within the structure of an arrangement can minimise risks in respect of the latter two points

What are the risks?

The main risk is a breach of compliance with National Minimum Wage. An employee is not legally entitled to agree to a reduction in gross pay entitlement which takes them below the applicable rate of NMW. A breach will result in the employer becoming liable to fund any shortfall, uplifted to the appropriate rate if the refund is made in a later year. They may also be included within the Governments “Name and Shame” process, if this is reactivated in the future.

When considering NMW compliance an employer needs to ensure it has sufficient knowledge of its workforce to evaluate whether the requirements of the legislation and regulations have been met, including:

• other salary sacrifice arrangements - if an employer also operates salary sacrifice for other benefits, such as childcare and ultra-low emission vehicles, the full value of pay forgone needs to be considered, not any one arrangement in isolation

• worker type - which category does a worker fall into, salaried hours, time work, output or unmeasured. The criteria for measuring compliance may be different for each

• non-standard periods - does the client have a process for checking NMW entitlement has been met in pay periods where a worker has started or left. It’s standard payroll methodology for apportioning pay entitlement may not be in line with the regulations

Cases highlighted in the media, such as Staffline and Iceland, illustrate the aggressive approach that HMRC seem to be taking in relation to NWM the relevant legislation and regulations.

Complexities arising from auto-enrolment

For those of us who were in the Employment Taxes arena prior to April 2012, it seems a long time since the introduction of auto-enrolment, when pensions salary sacrifice was more straight forward. The legislative imposition of pension obligations on employers has created some further complexities that need to be taken into account when documenting the implementation and ongoing operational process for pensions salary exchange:

• “Out, but not out out” - an employee will usually be given the right to opt out of a salary sacrifice arrangement, either at the outset or at an annual renewal point. However, some may not understand that opting out of a salary sacrifice arrangement will not remove them from the pension scheme, just reinstate them as making contributions personally, without the associated National Insurance savings. Any wish to remove themselves from the pension scheme must follow the process defined by the pension scheme administrator, which operates separately from salary sacrifice

• Data provision to pension scheme - the payroll process for most clients has been extended substantially by auto-enrolment, including a requirement to periodically upload pay, pensions contribution and various other data to the scheme administrator. Implementing salary sacrifice for pensions may, depending on the specific pension scheme data setup, create new “worker groups”, a population assigned to a specific pensions scheme set up, requiring communication with the pension scheme ahead of any data upload after the salary sacrifice arrangement goes live, to understand any new data requirements created and how they must be met

In summary, careful planning and making sure that clients follow you on the journey through arrangement design and implementation can ensure that employers and employees can generate savings whilst saving for retirement.

For further advice on pensions salary sacrifice or any other aspects of employment tax planning and compliance, please contact James Hunt on jhunt@dains.com

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