Auto-Enrolment and Salary exchange
Salary exchange or salary sacrifice can be used to meet the minimum contributions for an auto enrolment pension scheme…and save tax into the bargain! If you would like our help in getting this sorted then please email us on firstname.lastname@example.org
Employer contributions are used to provide the total minimum contribution, the fact that this total employer contribution is the result of the employee agreeing to give up some of their salary doesn’t stop salary exchange being used for automatic enrolment purposes. However the total contribution cannot be funded by the employee. Salary exchange should only be used to allow the employee to pay what would normally be the employee contribution with the employer paying the required minimum employer contribution.
Salary exchange cannot be the sole option for complying with the employer’s automatic enrolment duties, the employee must also be allowed to elect instead for a conventional employee and employer contribution structure.
As far as The Pensions Regulator (TPR) is concerned the employer must use the post exchanged salary to calculate whether or not minimum contributions have been met when salary exchange is being used for an auto enrolment scheme.
It will require a calculation in advance of the salary variation to calculate what salary level would result in the minimum contribution being met when measured against the post sacrifice salary. Many will prefer to use the pre exchange salary to ensure the minimum contribution is met to avoid objections by TPR.
Salary Exchange, Automatic Enrolment and HMRC
HM Revenue and Customs (HMRC) have recognised that some employers are planning to enrol employees into the workplace pension scheme in combination with salary exchange arrangements. Provided the employer ensures that an effective variation of the contractual terms and conditions has taken place, reducing some of the employee’s cash earnings, HMRC should be satisfied that the employer can use salary exchange for its workplace pension scheme.
If the employee subsequently opts out of or decides to stop paying into the workplace pension scheme then the salary exchange arrangement may be revised, varying the terms and conditions relating to remuneration.
When an automatically enrolled employee opts out before the appropriate deadline and as such does not become a member of the workplace pension scheme, it is possible that the employee will have received a payment of cash earnings reduced under the salary sacrifice arrangement. If the employer subsequently pays an amount to the employee to make good that shortfall then the payment should be made subject to the deduction of tax under PAYE and NIC in the normal way.
A word of warning, if you wish to allow your employee to ‘opt in’ and ‘opt out’ of a salary exchange arrangement, you’ll have to alter their contract with each change. This is because the employee’s contract must spell out clearly what their cash and non-cash entitlements are at any given time.
If a salary exchange arrangement allows an employee to swap between cash earnings and a non-cash benefit whenever they like, then they haven’t really sacrificed their entitlement to the cash earnings, as is required. In those circumstances, any expected tax and NICs advantages under the salary exchange arrangement will not apply
When a salary exchange scheme has been put in place, clearance can be obtained from HMRC to confirm the correct tax treatment of the arrangement.
Useful reading is provided by HMRC’s specialist guide – here
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