HM Revenue & Customs (HMRC) has made a salary sacrifice guidance change which means workers opting out of auto-enrolment cannot be left out of pocket.
The change also provides much needed clarity to employers about the validity of salary sacrifice arrangements being used to meet auto-enrolment obligations. Prior to the change, those auto-enrolled via a salary sacrifice arrangement might have lost out financially, says Friends Life.
Under salary sacrifice, an employee agrees to a contractual reduction in salary in exchange for an enhanced employer pension contribution, delivering national insurance contribution (NIC) savings for both the employee and employer. While opting out of the company pension is allowed, cancelling a salary sacrifice arrangement (unless due to a lifetime event) is not permitted. This means the employee may not be entitled to the refund of the salary sacrificed despite the cessation of pension scheme contributions.
For employers, this meant there was a real danger that, by allowing employees to cancel a salary sacrifice arrangement, the validity of the whole of the company’s sacrifice arrangement could have been called into question from a tax and NIC perspective.
HMRC has now confirmed that employees auto-enrolled via salary sacrifice will not be held to the arrangement if they subsequently opt out of the pension scheme.
Author: Pensions WorldPensions World is the leading monthly magazine for pensions professionals published by LexisNexis.