News Flash: Update on Workplace Pension Schemes and Auto-enrolment

In light of the introduction of Pension Auto Enrolment later this year, HMRC has today updated their FAQs on salary sacrifice, announcing a number of changes in their approach towards pension salary sacrifice arrangements.

Many employers offer the option for employees to participate in salary sacrifice schemes as part of a wider benefits package.  In addition most of those employers that have not introduced pension salary sacrifice in the past are considering the benefits of introducing such an arrangement prior to their staging date under Pension Auto Enrolment.

Historical Approach to Salary Sacrifice

The principles of salary sacrifice are well established and offer employees the choice to reduce their gross salary and receive an additional employer provided benefit which is usually tax and NIC efficient. The advantage of using a salary sacrifice arrangement to convert an employee pension contribution into an employer contribution is that both an employer and employee save the Class 1 NIC charge that arises on employee pension contributions.

For a salary sacrifice arrangement to be effective, there has to be a legal variation to an employee’s terms and conditions of employment i.e. reducing their gross salary by the amount sacrificed, typically for at least a 12 month period.  HMRC has accepted that in certain circumstances (known as “lifestyle events”, such as birth of a child, change in hours etc) employees can opt out of the salary sacrifice arrangement and return to the pre-sacrifice level of salary before the 12 month period has expired. However, HMRC has always been of the opinion that the pre-sacrifice level of salary can only be re-instated from the day the employee opted out, and not retrospectively. 

This approach by HMRC would appear to create an issue for pension auto-enrolment as under auto-enrolment an employee may choose to opt-out of the pension scheme within the initial one month opt-out window. If they did opt out in this period, the auto-enrolment legislation states that they are to be treated as if they had never been a pension scheme member and would have any contributions deducted repaid to them. 

Under auto-enrolment, if the employer had operated salary sacrifice then ) the employee (assuming they hadn’t opted out of salary sacrifice) would have had no repayment due to them when they opted out of auto-enrolment during the opt-out window, as strictly they had not made any contributions, they had simply sacrificed an amount of salary and the employer had made a corresponding pension contribution. In the event that the employer nevertheless repaid to the employee the amount of the sacrifice it was likely that HMRC would argue that this invalidated the whole salary sacrifice arrangement. It would appear that HMRC has recognised that under pension auto-enrolment this approach is likely to create a problem for many employers and as a consequence they have updated their guidance today.

Last week’s announcement

HMRC is proposing that with the use of special legislation which has been enacted, an employee can opt out of pension salary sacrifice at any time without prejudicing the validity of the salary sacrifice arrangements and without the need for the employee to have experienced one of a predetermined set of “Lifestyle Events”.  Furthermore, should an employee opt-out the employer can refund the salary that has been sacrificed and the refund will be subject to tax and NIC (via the payroll) at the time of its repayment. 

PwC View

PwC welcomes the amendments to HMRC’s guidance on Salary Sacrifice.  The changes, which mean that the list of salary sacrifice schemes which allow opting out at any time is now to include pension contributions, is a sensible compromise.  Had it not been for these changes there was a danger that HMRC’s rules on salary sacrifice would have conflicted with the auto-enrolment legislation which permits eligible job holders to opt-out within the first month of being auto-enroled.

John Harding, PwC’s Employment Solutions Director, welcomes this announcement. He said:

‘It’s always good to see that the government is listening to the concerns of employers.  In the current challenging business environment many employers who hadn’t previously introduced pension salary sacrifice are looking to do so in order to minimise the costs of auto enrolment.  While there are still a number of areas that employers will have to consider when introducing salary sacrifice for pension contributions, this latest announcement removes an area of uncertainty and is therefore very welcome indeed.’

John added:

‘I expect to see a surge in the number of employers putting pension salary sacrifice schemes in place as well as a large number of those that currently have such arrangements revisiting their schemes as a result of both this latest announcement and to ensure that their existing pension salary sacrifice arrangements meet their obligations under auto-enrolment.’

John Harding
Director, Human Resource Services
Direct line: 0161 247 4542