How does salary sacrifice interact with the auto-enrolment regime?

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Published on LexisPSL on 18/11/2013

The following Pensions Q&A provides comprehensive and up to date legal information covering:

  • How does salary sacrifice interact with the auto-enrolment regime?
  • What is salary sacrifice?
  • How does it work?
  • Can the employee opt out of the salary sacrifice arrangement?
  • So how does the right to opt out of an auto-enrolment scheme work with salary sacrifice then?

What is salary sacrifice?

Salary sacrifice (also called salary exchange) operates by varying an employee's terms and conditions of employment in relation to their pay. In effect, an employee agrees to give up the right to receive part of their earnings in return for the employer's agreement to provide the employee with some form of non-cash benefit. A non-cash benefit can include pension contributions where the amount that the employee gives up or 'sacrifices' from their pay is paid instead by the employer as pension contributions made on behalf of that employee into the pension scheme. As National Insurance Contributions (NICs) are determined in accordance with the remuneration which the employee actually receives, both the employer and employee will pay lower NICs as a result. Some employers may agree to pay part of their NICs savings into the employee's pension as well, although there is no obligation on employers to do this.

How does it work?

In practice, the employee must give up part of their entitlement to future earnings before it is treated as 'received' for employment income tax and NICs purposes. This is because once an employee's earnings are considered to be 'received', they are taxable as employment income and subject to NICs, even where no actual payment is paid over. This means that a salary sacrifice arrangement is only effective when:

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