Salary Sacrifice

Dominic Buggy · Posted: Tue Jan 08, 2008 1:22 pm Post subject: Salary Sacrifice

I have a client who currently operates a salary sacrifice scheme providing Childcare Vouchers.
They are now implementing a new pension scheme, and offering another salary sacrifice/exchange option.
For those employees already in receipt of childcare vouchers, how would you calculate the pensionable salary? Should it be the salary pre the deduction for vouchers, ie the original basic salary, or post the deduction for vouchers?
Any advice would be appreciated.

Ian Congreave

I have never given any thought to an employee having two concurrent salary sacrifices in place, but it is bound to happen.

Leaving "pensionable salary" to one side for a moment, for salary sacrifices for both child vouchers and pension contributions to be effective for tax purposes, they must both involve a genuine reduction in the employee's contractual salary.

For example, let's say that that the employee receives �50 worth of child vouchers each week and, in addition, the employer makes a 5% pension contribution instead of the employee. If the starting salary, before either sacrifice, were �24,000, the contractual salary after the voucher sacrifice would be �21,400 (i.e. �24,000 - (52 � �50)).

Now the difficult part. The employer is going to pay 5% of pensionable salary into the employee's pension scheme instead of the employee doing it. The sacrifice now depends on how "pensionable salary" is defined in the pension scheme rules - and there are lots of different definitions in use. Let's say, for the purposes of this example, that "pensionable salary" is the same as contractual salary each time the employee is paid. The contractual salary currently (after the voucher sacrifice) is �21,400. A 5% contribution is �1,070, so the employee's contractual salary is reduced further to �20,330.

My example takes "pensionable salary" to be the employee's contractual salary as this is the easiest situation to explain. However, if "pensionable salary" is defined in the scheme rules so that it can vary each payday (e.g. it includes overtime or bonus payments) and, as a result, the employee's deduction varies each payday, converting that into a salary sacrifice becomes a problem. It might be that HMRC would accept a particular scheme where the employer's contribution varies each month depending on variations in the employee's pay, but I doubt it.

If "pensionable salary" does vary each payday, a solution might be for the salary sacrifice to be a fixed monthly amount that is always less than the employee's variable salary, with the employee making a pension contribution as usual on the difference between the two.

So, my answer to your question is that "pensionable salary" is as defined in your client's pension scheme rules and, if it is anything other than a fixed monthly amount, there will be problems in building that into a salary sacrifice scheme.

Perhaps some other visitors have actually tackled this problem. Any further suggestions??
_________________
Ian Congreave, PayPerShop owner

PayPerShop provides a free weekly UK payroll news service - http://www.paypershop.com/latestnews.html

Jim Ross · Posted: Wed Jan 23, 2008 12:53 pm Post subject:

generally a scheme rule change is needed so that 'pensionable' salary can be replaced with 'reference' or similar, this can then be defined as sary that would have been recieved if no sacrifice had been made. in your example �24K

Dominic Buggy · Posted: Thu Jan 24, 2008 10:17 am Post subject:

Thanks! That's exactly what they have done.

apserve · PayPerShop Member Joined: 23 Apr 2008 Posts: 42

When looking into CCVs for a local authority, the county Local Government Pension Scheme (LGPS) advised after months of consultation that Nominal, pre Sacrifice, Salary would be regarded as pensionable pay.

If I remember correctly, HMRC agreed to this as well but I cannot remember their ruling on maximum contributions. % of what?

Not that that matters anymore.

It is down to the sheme rules.

danhutson80 · Posted: Thu May 08, 2008 3:03 pm Post subject:

The actual pensionable side of the salary should not change whether an employee has Childcare Vouchers or not, as this element of pay is not in itself pensionable, only tax and NI free.

For example an employee with a �24,000 Basic Salary with �1,500 worth of voucher deductions, their pensionable salary will remain at �24,000 and this would also be their reference salary, their sacrifice salary is �22,500.

We run most exchanges under the sun (i.e. Childcare, bicycles, the now defunct Home Computers and Pension)