HMRC has clarified the regulations surrounding pension contributions in response to a public query. The tax body was asked over social media: “If salary sacrifice would take me below NMW [National Minimum Wage] can the employer cap my sacrifice to NMW and if so do they still have to comply with pension minimum contribution of 8% in total?”
Under auto-enrolment rules, employers are required to enrol their employees into a workplace pension scheme, ensuring that at least 8% of the worker’s earnings go towards the pension pot. In reply to the taxpayer, HMRC said: “A salary sacrifice arrangement must not reduce an employee’s cash earnings below the National Minimum Wage (NMW) rates.”
They spelled out an important restriction: “Employers must put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained. The specifics depend on the type of scheme arrangements in place and you will need to check this with your employer.”
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HMRC also directed the individual to a guidance page for more information on salary sacrifice. If an employee chooses to join a salary sacrifice scheme, this must be added to their employment contract. The Government advice explains: “The impact on tax and National Insurance contributions payable for any employee will depend on the pay and non-cash benefits that makeup the salary sacrifice arrangement.
“You need to pay and deduct the right amount of tax and National Insurance contributions for the cash and benefits you provide. For the cash component, that means operating the PAYE system correctly through your payroll.” From next month, the perks of salary sacrifice are set to become even more attractive as employers National Insurance will jump from 13.8% to 15%.
Financial advisory firm Hymans Robertson is championing salary sacrifice as a smart move for employers. Hannah English, Head of DC Corporate Consulting at the firm, said: “The savings employers could benefit from, by introducing a salary sacrifice system for employee pension contributions, should not be understated. For every £100,000 of salary sacrificed, a £15,000 saving unlocks doors for businesses at a time where costs are being squeezed.
“Employers who already have a salary sacrifice system in place should maximise employee pension contributions in this way. They could also encourage further savings into a pension through other means – for example, through bonus sacrifice. This would help mitigate the changes that come into place in early April while improving the retirement prospects of existing employees.”
