Salary sacrifice and pensions

Produced by Tolley in association with

Employment Tax

Guidance

The default position when an employee enters an employer’s pension scheme is for their pension contribution to be deducted from net pay. This is also the case for automatic enrolment (see below and PenA 2008, s 33, which authorises deductions without requiring employee consent). While this is generally tax efficient (subject to certain limits - see the Pension scheme types guidance note), both employee and employer will suffer irrecoverable NICs on the salary contributed to the pension.

Alternatively, an employee can enter into a salary sacrifice agreement whereby they cease to make a contribution from their net pay and reduce their gross pay in favour of an increased employer pension contribution. It is important to remember that under a salary sacrifice arrangement employees will not actually be making a pension contribution; they are sacrificing salary and personal contributions in favour of increased employer contributions. Salary sacrifice arrangements are allowable under the automatic enrolment rules, but an employee cannot be obliged to enter into a salary sacrifice

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Robert Woodward

Employment Tax Manager at Frank Hirth plc

Robert is an expert in UK employment tax matters for employers with UK based employees, including UK employees working overseas, and overseas employees coming to the UK. He has extensive experience of advising clients with regards to PAYE matters, employee benefits and social security as well as employment related payments outside the payroll functions such as termination settlements and payments to consultants and other non-payroll labour. After graduating in Politics and Law from the University of Southampton, Robert started his tax career at HMRC as an employer compliance officer undertaking enquiries into employers' expenses and benefits systems before moving into a large international practice and then into the Big 4. Here he assisted with tax investigations, flexible benefits planning, employment tax compliance and international social security. Robert has presented to various audiences and has had a number of articles published in various magazines on employment tax matters. Robert is a fully qualified member of both the Association of Taxation Technicians (ATT) and the Chartered Institute of Taxation (CTA).

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