NIM02331 - Class 1 NICs: Earnings of employees and office holders: The Smart Pensions Scheme
Paragraph 3 of Part 6 of Schedule 3 to the Social Security (Contributions) Regulations 2001
We have recently become aware of the marketing of a new salary sacrifice scheme and have secured legal advice regarding the operation of that scheme. The scheme is called the Smart Pensions Scheme.
The following information provides guidance regarding this scheme but see NIM02330 for general guidance about salary sacrifice arrangements.
The Smart Pensions Scheme basically operates in the following way:-
- The employee gives up an amount of cash salary equivalent to the contributions they are making to the company’s approved pension scheme.
- The employer agrees to increase employer contributions to the pension scheme by an equivalent amount.
- Employees are notified that the new arrangements will automatically apply from a particular date unless they opt out in advance.
- If they do not opt out at the start, employees cannot opt out again until the first anniversary of the commencement of the scheme, unless they experience a ‘lifestyle change’ (marriage, birth of a child, separation or divorce, death of a partner or child, change from full-time work to part-time).
- Participation in the scheme brings about a change to the terms and conditions of employment of the participants.
- The employee’s previous gross salary (“base salary”) remains the yardstick for other issues (e.g. the calculation of overtime pay, annual salary increases or salary- related benefits).
If the Smart Pensions Scheme is effective it will reduce Class 1 NICs liability. This outcome arises because NICs will be payable only on the reduced salary. NICs will not be payable on the employer contributions to the approved pension scheme as these contributions are specifically disregarded by virtue of paragraph 3 of Part 6 of Schedule 3 to the Social Security (Contributions) Regulations 2001. The NICs saving will equate to the NICs originally due on the amount of salary which is sacrificed.
Legal advice has confirmed that the Smart Pensions Scheme can be effective in reducing the NICs liability of the operating employer and of employees who decide to participate.
Since the employees do not have to sign a document signifying their acceptance of the revised terms and conditions of employment, does this mean the contract has not been varied?
No. The scheme is clearly intended to vary the terms and conditions of employment of all employees except those who opt out. This is made known to all employees in advance of the scheme being introduced. The fact that those employees who do not opt out accept the payment of the reduced salary without objection means that they have accepted the variation to their contract by their conduct.
If the “base salary” continues to be used to determine things like overtime pay, does this indicate that the cash salary has not actually been reduced?
No. Using the “base salary” for such purposes is not incompatible with there being a genuine reduction in the employee’s contractual pay, and these other issues can be determined on any basis agreed between the employer and employee. The essential thing for us to establish is whether the terms and conditions of employment have been varied to reduce the cash salary. Where this is the case the employee will not be able to sue for payment of the original level of salary.
It is, however, important in all cases to check that the scheme has been properly implemented so as to give effect to the varied terms and conditions of employment. For instance, by checking that the necessary changes have been made to the rules of the pension scheme to reflect the cessation of the employee’s contributions and the increase in the employer’s contributions. It should also be confirmed that the changes are reflected in the employee’s wage-slips, PAYE records, etc.