Salary Sacrifice: Employer Contributions Vs Employee Contributions

DoctorStrange

I believe that, currently, if an employee uses Salary Sacrifice to add e.g 5% into their pension, then this amount is added to any additional payments from the employer ( e.g. 3% auto enrollment) and the total amount of 8% is paid into the pension as an "employer contribution".

From 2029, though, it seems the 3% will be reclassified as "genuine employer contribution" (and thus remain free of NICs) whereas the 5% will become an "employee contribution" and thus attract NICs (ignoring the £2k threshold for simplicity).

My question is what's to stop employees renegotiating their contacts to formalise the 'swap' between salary and pension? 

For example, if my salary is £160k and I "sacrifice" £60k then, from 2029, £58k of that will be chargeable to both Employer and Employee NICs.

However, if I formally agree to a new salary of £100k with a £5k a month pension contribution on top, this would still be permitted.

It seems relatively straightforward (notwithstanding the admin burden) to avoid this new tax entirely but I feel I'm missing something, so wanted to check what other people's thoughts were currently, in the absence of any further guidance yet being available.

Dead_keen

Yes, you are missing the existing optional remuneration arrangement rules.

Contractual changes

Agreeing to a contractual change to your pay and employer pension contributions is exactly what salary sacrifice is.  Yes, there is the concept of "headline pay" or "notional pay" or whatever on what pay rises, final salary pensions and mortgage references are based on.  But salary sacrifice is just a change to your contractual pay.

The government is not going to ban changes to contractual pay in any shape or form.  So doing what you suggest will always be "permitted".  The question then is whether the new NIC rules that the government introduces will distinguish between the current salary sacrifice way of doing things and "your way".  My guess is that there is that "your way" will not succeed unless it is done for the entire workforce on a mandatory basis.  But that is just a guess and so feel free to ignore it and take whatever view you want.

Process for changes to NIC rules

Before looking at what might change:

1. The government have said that they will introduce legislation early to implement the change, to "enshrine" it in legislation. Let's say that is done by 29 July 2026.

2. My guess is that they will do a good job at stopping "your way" working.  But some "clever" / "dodgy" promoter might say "if you cross your fingers behind your back holding a copy of Butterworths in your left hand and do the sacrifice via a Cyprus trust, you will be fine".

3. So the government will then: (i) say we think that doesn't work, (ii) will bring a bit more legislation that hammers home that it does not work, and (iii) will introduce a universal stop notice to say that anyone who promotes this type of silly idea, that has no realistic prospect of success, will face a range of sanctions, including financial penalties and criminal prosecution. Just to be clear, this type of universal stop notice is not something I have just made up.

As a consequence of 1, few employers would try it on because of the risk of having to pay HMRC both the employee's and employer's NIC (plus interest plus penalties). 

If 3 happens then I suspect it would only be those employers who have their heads in the sand and don't take advice.

Optional remuneration arrangement rules

So what will the change be?  It will just say that pensions are now included in the existing Operational Remuneration Agreement (OpRA) rules.  So if there is a choice of higher pay or higher pension, the NIC is due on the higher pay.  So if you are asked, or you ask, for lower pay and higher pension contributions, you are squarely in the rules. 

If the employer tells the whole workforce "you are all going to take a 5% pay cut whether and have 5% higher pensions, with no opt-outs regardless of your circumstances" then they may well be fine (or not, depending what the new rules are).  

I suspect that because of the amount at stake the government will also add a targeted anti-avoidance rule along the lines of no account shall be taken of any arrangement whose purpose, or main purpose, is to get around OpRA.  But what do I know.

You can google more about the existing optional remuneration arrangement rules. 

For completeness, there may will be situations where it might work for a potential new joiner as part of a bespoke negotiations.  But here is an example of why HMRC think it won't apply to some pre-employment negotiations - https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim44143

DoctorStrange

Thank you. 

Very detailed answer and makes sense.

Albermarle

As a consequence of 1, few employers would try it on because of the risk of having to pay HMRC both the employee's and employer's NIC (plus interest plus penalties). 

Even now, more than 50% do not even operate salary sacrifice schemes, many because they thought it always sounded a bit dodgy and there might be some blowback at some point.

Dead_keen

Albermarle said:

As a consequence of 1, few employers would try it on because of the risk of having to pay HMRC both the employee's and employer's NIC (plus interest plus penalties). 

Even now, more than 50% do not even operate salary sacrifice schemes, many because they thought it always sounded a bit dodgy and there might be some blowback at some point.

I'm not going to argue with you about statistics but in my experience (and supported by surveys) is that the vast majority of larger private sector employers use salary sacrifice. 

I am happy to argue with you to the cows come home on the "many because they thought it always sounded a bit dodgy" point.  While that may have been true in 2002, it would be incredibly rare for a large employer to think that today.  The second  employer to implement salary sacrifice on an all-employee basis had a great relationship with HM Treasury and got it to bless it.  After that, the floodgates opened and huge numbers of large employers started implementing it.  As part of that, the Inland Revenue changed its published guidance on salary sacrifice (to stop companies writing to it saying "we know you can't give clearance but this is what we are doing so please tell us if you have any issues" basis), payroll providers started building salary sacrifice into their systems and it became very mainstream.