Mutual insurer Royal London and Southampton-based IFA firm Radcliffe & Co have joined forces to call for changes to the rules around salary exchange for pensions to the benefit of low-paid workers.
Under a ‘salary exchange’ deal, a worker and an employer come to an arrangement whereby pension contributions are made wholly by an employer rather than split between employer and employee. Under normal circumstances, any money paid in wages is subject to employer and employee National Insurance Contributions (NICs), even if it is then paid by the worker into a pension scheme. But if all the pension contributions go directly from the firm into the pension rather than via the worker, this reduces the total NICs bill, to the potential benefit of both worker and firm.
The way that such schemes work in practice is that a worker will ‘sacrifice’ or ‘exchange’ part of their salary and in return the employer will make a pension contribution on behalf of the worker. Such schemes are increasingly commonplace, particularly among larger employers.
However, Royal London and Radcliffe’s are highlighting an anomaly which is preventing lower-paid workers from benefiting from such arrangements. The National Living Wage is currently set at £7.50 per hour for the over 25s, equating to an annual salary of £13,650 for a 35 hour week. If a worker is paid at this level it appears that it is illegal for the employer to offer a salary sacrifice arrangement for pensions, even if this would be to the financial advantage of the worker. This is because it would take the worker’s pay below the level of the national living wage.
Royal London’s Director of Policy, Steve Webb, has now written to the Secretary of State for Business, Energy & Industrial Strategy, Greg Clark MP, calling for a review of the rules. Steve Webb said:
"Given that the Treasury has specifically decided that employer pension contributions should continue to benefit from salary sacrifice arrangements, it seems unfair that lower-paid workers are currently missing out. National Living Wage legislation was designed to benefit lower-paid workers and it is doubtful whether the interaction with salary sacrifice was seriously considered when the legislation was drawn up. Having written to the Government about this issue I hope that they will change the rules and allow lower-paid workers to share in the benefits of these arrangements."
Marc Cumberlege, an Independent Financial Adviser at Radcliffe’s said:
"This is not just a theoretical issue. I have come across employers who want to deliver high quality pension provision to their staff in a cost-effective way and risk falling foul of minimum wage legislation if they do so. Salary exchange arrangements can be mutually beneficial to workers and employers alike and should be available to all."
The number of workers affected by the National Living Wage is rising rapidly and HM Treasury estimates that around 2.9 million workers will be on this wage rate by 2020.
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Notes to editor:
- HM Treasury reviewed the operation of ‘Salary Sacrifice’ schemes in December 2016. In that consultation they reported that: “HMRC saw an increase in clearance requests for salary sacrifice schemes between 2009/10 and 2014/15 of a third”. (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/574838/Consultation_on_salary_sacrifice_for_the_provision_of_benefits-in-kind_-_summary_of_responses.pdf )
About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £117 billion, 8.8 million policies in force and 3,745 employees. Figures quoted are as at 30 June 2018.