Increasing salary sacrifice before maternity

Alexland · 7 November 2018 at 10:41PM

Hi,

My wife is pregnant again, likely to take 12 months maternity leave and may decide not to return. The birth is likely to align to the start of the new tax year. Am I correct in understanding that the employer will be required to honor her normal salary sacrifice monthly DC pension contributions (regardless of declining pay) during the maternity leave? As such it may be beneficial for her to increase the percentage salary sacrifice pension contribution now 4+ months in advance of the maternity leave starting? The below guidance looks too good to be true?

http://www.mattioliwoods.com/latest-news/dont-be-left-holding-the-baby-employer-responsibility-during-an-employees-maternity-leave

Employer pension contributions should continue during any paid period of maternity leave at the same rate as before leave, based on the employee’s actual salary. Any matching employee’s pension contribution only needs to be based on the pay they are receiving at the time (i.e. SMP).

However, ‘normal’ under a sacrifice arrangement may be the total pension contribution, i.e. if an employer contribution is 5% and the employee’s 3% into a DC scheme. The employee makes their contribution by salary sacrifice, making the employer’s normal contribution 8%. As a salary sacrifice arrangement is a contractual change, the employer is required to continue to contribute 8% as if the employee were in receipt of full pay.

Employees in receipt of statutory maternity/paternity/ adoption pay cannot have a contribution deducted as statutory payments are protected earnings. As such, the amount cannot be recovered from the employee, so the employer must fund the full contractual employer pension contribution.

Alex

Albermarle · 8 November 2018 at 12:25PM

I can not comment on the government advice except to say it does look a bit too good to be true.
However I do know that some employers will only allow you to review your salsac/contribution % once a year , to keep administration issues down.

Thrugelmir · 8 November 2018 at 12:58PM

A consideration for the employer is that salary sacrifice schemes should have clealy defined rules. Would be questionable if her salary was reduced for the duration of the maternity leave, then increased upon her return to work for example.

Alexland · 8 November 2018 at 1:27PM

Our employer's rules are fairly flexible on modifying pension salary sacrifice to accomodate bonuses, etc so that shouldn't be a problem. I just slightly modified mine to more precisely avoid higher rate tax this year.

At the moment, as she is part time so basic rate, her total pension contribution is only 25% but some quick maths suggests it might be worth increasing by around 40% so that the employer will be required to continue making pension contributions where she would otherwise have pay reductions during the year.

It would still put her above minimum wage for her contracted hours and she should still be able to use her personal allowance against the remaining enhanced maternity, taxable benefits (car, medical, etc) and the 39 weeks statuatory maternity pay for which the government wouldn't allow any employer deductions.

I'm scratching my head thinking this is worth thousands of pounds (in addition to the tax/NI saving) during the year so what's the catch? Other than maybe upsetting the employer but I am good friends with her management chain and it's not their money - they will just see less of a reduction in their costs each month.

Alex

Thrugelmir · 8 November 2018 at 5:55PM

Alexland wrote: »

Our employer's rules are fairly flexible on modifying pension salary sacrifice to accomodate bonuses, etc so that shouldn't be a problem.

HMRC are the final arbritrators. Employers just need to stay within the permissable limits of flexibility.

Snakey · 8 November 2018 at 8:50PM

I considered this, back when I was putting £40k or £50k a year in to my pension and only paying basic rate tax. They were giving me a hard time over something or other and I thought wouldn't it be funny to spend the next 4-5 years having three kids one after the other and they can pretty much bankroll the whole thing and there'll be nothing they can do about it.

I didn't do it because it involved having a baby - the opportunity cost might be less on a lower salary but raising kids would soak up any "profit" I might have made not to mention the effort involved (suppose I could have put them out for adoption but it all started to sound a bit complicated) - but I looked at it pretty closely just for fun and couldn't find any reason why it wouldn't work.

My situation was different in that I'd been doing that level of salary sacrifice genuinely for a few years with maternity leave being the furthest thing from my mind, so they would struggle to justify an accusation of gaming the system, but I don't recall seeing any sort of "...unless the employee is obviously taking the mickey" get-out for the employer.

Would be interested to know how you get on!

pinknsparkly · 8 November 2018 at 9:15PM

Hi Alex,

I'm afraid I have no idea about your situation but I echo the above poster when I say please let us know the outcome. This isn't something I could do (as an NHS employee) but if (hopefully when!) we have a child, our intention is for me to take the first six months as maternity leave and my husband to take the following six months as shared parental leave so if we could bump up his pension while he's off then we'd definitely consider it! He currently pays around 15% total (13% from his salary and 2 or 3% employer) so even that continuing to be contributed would be great. It's not something I'd ever considered before - I assumed your NI contributions were still made for SSP but nothing put into your workplace pension.

Alexland · 8 November 2018 at 10:17PM

I just checked my wife's pension contributions from her previous year of maternity leave and it looks like our employer held their 10% contribution level flat but reduced her 15% salary swap contributions in line with her reducing pay during the year. Is this right? I thought the whole point of salary sacrifice was that the whole 25% becomes an employer contribution?

Alex

kidmugsy · 8 November 2018 at 11:30PM

Alexland wrote: »

I just checked my wife's pension contributions from her previous year of maternity leave and it looks like our employer held their 10% contribution level flat but reduced her 15% salary swap contributions in line with her reducing pay during the year. Is this right? I thought the whole point of salary sacrifice was that the whole 25% becomes an employer contribution?

I don't see what you mean. Could you rewrite that, please, distinguishing between percentages sacrificed and amounts contributed?

Alexland · 9 November 2018 at 12:41AM

kidmugsy wrote: »

I don't see what you mean. Could you rewrite that, please, distinguishing between percentages sacrificed and amounts contributed?

Not sure how I can make it much clearer. The employee offers to sacrifice 15% of their salary and the employer adds up to 10% matched so the total employer contractual contribution becomes 25% and the employee is paid 85%. However the employer has not been maintaining the full 25% contribution during the maternity year. They have been varying the 15% based on the reducing monthly pay as if it was a non salary-sacrificed employee contribution. Surely this isn't correct given the guidance in the top post?

Alex

Thrugelmir · 9 November 2018 at 12:44AM

Alexland wrote: »

I just checked my wife's pension contributions from her previous year of maternity leave and it looks like our employer held their 10% contribution level flat but reduced her 15% salary swap contributions in line with her reducing pay during the year. Is this right? I thought the whole point of salary sacrifice was that the whole 25% becomes an employer contribution?

Alex

What did her revised issued contractual terms say after the sacrifice was made.

Increasing salary sacrifice before maternity

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