Employment Tax

Salary sacrifice and pensions

Produced by Tolley in association with Robert Woodward
  • 01 Nov 2021 12:42

The following Employment Tax guidance note Produced by Tolley in association with Robert Woodward provides comprehensive and up to date tax information covering:

  • Salary sacrifice and pensions
  • Pensions automatic enrolment
  • Contribution levels
  • Opt in and opt out
  • Refund of contributions

Salary sacrifice and pensions

The default position when an employee enters an employer’s pension scheme is for their pension contribution to be deducted from net pay. This is also the case for automatic enrolment (see below and PenA 2008, s 33, which authorises deductions without requiring employee consent). While this is generally tax efficient (subject to the individual’s Annual Allowance and Lifetime Allowance), both employee and employer will suffer irrecoverable NICs on the salary contributed to the pension.

Alternatively, an employee can enter into a salary sacrifice agreement whereby they cease to make a contribution from their net pay and reduce their gross pay in favour of an increased employer pension contribution. It is important to remember that under a salary sacrifice arrangement employees will not actually be making a pension contribution; they are sacrificing salary and personal contributions in favour of increased employer contributions. Salary sacrifice arrangements are allowable under the automatic enrolment rules, but an employee cannot be obliged to enter into a salary sacrifice arrangement and the employer must make arrangements for pension provision for any employee not choosing salary sacrifice, in accordance with the automatic enrolment rules (see below).

Pensions and employer-funded pension advices are specifically excluded from the optional remuneration arrangements legislation effective from 6 April 2017.

The requirements for a valid salary sacrifice arrangement have been covered elsewhere (see the Salary sacrifice arrangements ― overview guidance note), but in relation to pension contributions:

  1. the employee must forego the right to the salary in favour of an employer pension contribution

  2. the pension contributions must continue to be made during paid maternity leave, whether or not the salary sacrifice can be operated

  3. the arrangement must be in place before entitlement to salary arises

  4. it must not result in the gross pay falling below the l

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