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HMRC internal manual

Employment Income Manual

Salary sacrifice: contributions to a registered pension scheme: example of unsuccessful salary sacrifice

Section 62 ITEPA 2003

This is an example of an unsuccessful salary sacrifice and its Income Tax effects. See also EIM42790.

For an example of a salary sacrifice that is successful, see EIM42785.

For information on salary sacrifice generally, see EIM42750 onwards.

Example of unsuccessful salary sacrifice

A company employs 20 people. There is a registered pension scheme for the employees. The scheme is run by an insurance company. Each employee has the option of joining the scheme and also of deciding the amount of his or her monthly pension contribution. The employee’s contributions could be made to the pension scheme by:

  • each employee sending a personal cheque or arranging a personal standing order to the insurance company
  • the employer collecting all the employees’ contributions from the participating employees and then sending one cheque for all of those employees contributions to the insurance company

The second alternative is much easier administratively for the insurance company. That is what the employing company does. The employing company gets the agreement of all of the participating employees to pay their employees’ contributions on their behalf. The employees agree that the employing company can deduct the amount of the contributions from their wage packet.

This is not a successful salary sacrifice. The true construction of the revised arrangement between employer and employee is that each employee still remains entitled to the same level of cash remuneration as previously. Each employee is merely asking the employer to apply part of that cash remuneration on their behalf by paying the employee’s pension contribution - see EIM42769.

Each employee remains taxable on the continuing level of cash remuneration. But there will be full tax relief available on these employees’ contributions subject to the maximum of 100% of their employment income.

From 6 April 2017, the Income Tax and NICs advantages where benefits in kind are provided through salary sacrifice arrangements (described in the Finance Act 2017 as “optional remuneration arrangements”) are largely withdrawn. Guidance on optional remuneration arrangements from 6 April 2017 starts at EIM44000.

Transitional provisions apply for a limited period. For further details see EIM44030.

Certain benefits in kind are excluded from the changes. For further details see EIM44130.

Employer contributions into registered pension schemes and employer provided pensions advice are excluded from the April 2017 changes. Payments made under successful salary sacrifice arrangements continue to be regarded as employer contributions and not taxable on the employee.