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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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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. Seealso EIM42790.

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

For information on salary sacrifice generally see EIM42750onwards.

Example of unsuccessful salary sacrifice

A company employs 20 people. There is a registered pension scheme for the employees. Thescheme is run by an insurance company. Each employee has the option of joining the schemeand also of deciding the amount of his or her monthly pension contribution. The employee’scontributions 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. Thatis what the employing company does. The employing company gets the agreement of all of theparticipating employees to pay their employees` contributions on their behalf. Theemployees agree that the employing company can deduct the amount of the contributions fromtheir wage packet.

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

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