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13 Nov 2017

UK government urged to extend salary sacrifice to low-paid

Low-paid workers are missing out on the benefits of salary sacrifice, according to pension provider Royal London and a Southampton-based financial adviser.

Salary sacrifice, also known as salary exchange, allows a worker and an employer come to an arrangement whereby pension contributions are made wholly by the employer rather than split between employer and employee.

Under normal circumstances, any money paid in wages is subject to employer and employee National Insurance Contributions (NICs), even if it is then paid by the worker into a pension scheme. If a worker instead chooses to ‘sacrifice´ part of their salary and all the pension contributions go directly from the firm into the pension rather than via the worker, this reduces the total NICs bill, to the potential benefit of both worker and firm.

However, if a worker is paid at the level of the National Living Wage it appears to be illegal for the employer to offer a salary sacrifice arrangement for pensions, even if this would be to the financial advantage of the worker. This is because it would take the worker´s pay below the national minimum level.

Royal London and Radcliffe & Co are calling for a change in the rules so that an employer and employee can choose to make such an arrangement.

Steve Webb, director of policy at Royal London, said: “Given that the Treasury has specifically decided that employer pension contributions should continue to benefit from salary sacrifice arrangements, it seems unfair that lower-paid workers are currently missing out. National Living Wage legislation was designed to benefit lower-paid workers and it is doubtful whether the interaction with salary sacrifice was seriously considered when the legislation was drawn up.”

Webb has written to the Secretary of State for Business, Energy & Industrial Strategy, Greg Clark, calling for a review of the rules.

Copyright © M2 Bespoke 2017

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