None of my business!
A comment came in yesterday from someone who understands the obligations of pension schemes and their fiduciaries.
Sometimes I wonder if employers and providers know what they’re doing when offering the option to employees to move to “salary sacrifice”. This correspondent knows her onions.
Hello, I’ve been reading the tale of Gavin and his ‘misclassified’ pension with interest.
It makes me extremely concerned that Aviva (or any provider) requests, or even stores, information about salary sacrifice- it’s got nothing to do with them!
The result of a salary sacrifice, if handled correctly as a change in contract, means the individual is now in a non-contributory pension scheme. The salary having been sacrificed for an enhanced employer pension contribution.
When a provider receives employer only contributions, as long as those are at, or exceed, the auto enrolment statutory contribution levels that is all they need to know/check.
If there are no employee contributions no tax relief is due, the relief has been given at the employee’s highest marginal rate by the sacrifice (like a net pay scheme but with the added benefit of reducing ni’able pay, which the net pay solution doesn’t touch).
That’s why student loans are based on unreduced ni’able pay, so non-sacrifice schemes ensure that you don’t get student loan relief too!
If Aviva were receiving employee contributions this could not have been a salary sacrifice so tax relief should have been claimed.
The only classification that providers should have is RAS or NPA.
There are many good reasons why employees may chose not to save national insurance for the employer. These may include them losing visible salary for credit purposes or getting incentives when not being tax payers but paying pensions under relief at source.
But for those who have chosen not to be sacrificing their salary for a bigger pension, there is usually an expectation that the national insurance that is saved (employer contributions to pay are not “ni-able”) will be shared, usually by a higher pension contribution in what is now a non-contributory scheme.
I have seen some employers pocketing all their NI savings and a few selling the salary sacrifice as a saving for the employee (without much mention that it reduces the employers overall costs).
For the most part, salary sacrifice is assumed a “good thing” however much of the NI savings are passed on, the only losers being HMRC and the departments such as DWP and Health who have less NI passed to them.
But salary sacrifice now creates such savings in national insurance that the Government has put its foot down and from 2028 , only those with “minimal” personal contributions (£2,000 pa or £167 pm) will get the full benefit.
Stories like Gavin’s give HMRC and HMT good reason to press on. Salary sacrifice is misunderstood and misused these days. No national insurance is paid on pensions in payment and I can see no reason for any but the lowest paid being given a way to dodge NI through salary sacrifice.
That even an organisation as expert as Aviva can have got in the mess it does suggests to me that the simplicity of the approach outlined by my correspondent has long since been left behind and providers need to have a long hard look at what they’re doing in “managing” salary sacrifice.
There is nothing for a provider to manage – let alone encourage! Salary sacrifice is none of its business.
Far be it from me to disagree with your legal correspondent, Henry.
We can agree that pension providers should not be “managing” their clients’ payroll and tax reporting. And that the result of a salary sacrifice, if handled correctly as a change in employment contract, means each individual employee is now in a non-contributory pension scheme.
But master trust providers generally know whether participating employers are using salary sacrifice for National Insurance purposes, as this information is often considered essential for accurate payroll interface processing, contribution calculations, and tax reporting.
They rely on the employers to provide this data correctly.
Key details on how master trusts handle this information include
Setup and Administration: When an employer joins a master trust, they must specify their contribution method, including whether they are using a salary sacrifice (also known as salary exchange) arrangement.
Data Reporting: Employers are required to send contribution data to the master trust, indicating if the contributions are employer-only (which is the case in a salary sacrifice setup) or not.
Data Accuracy Risks: Although providers generally know, they rely on the accuracy of the data supplied by the employer. If an employer incorrectly tells the provider that a salary sacrifice is in place (or fails to notify them of a change), the provider will take it on trust and act accordingly, which can lead to errors in their reporting to HMRC.
Differentiation: Master trusts need to distinguish between salary sacrifice (employer contribution) and net pay arrangements (employee contribution) to properly handle income tax relief.
While HMRC does not need to be told about salary sacrifice arrangements, I would argue the pension provider does need to know to ensure contributions are processed correctly and reported later on to members and HMRC.