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HMRC relaxes salary sacrifice rules prior to auto-enrolment 24 April 2012

While opting out of a company pension is allowed, cancelling a salary sacrifice arrangement – unless due to a lifetime event – was not permitted. This meant an employee would not be entitled to a refund of the salary sacrificed despite the cessation of pension scheme contributions.

The relaxation of the rules means employees auto-enrolled via salary sacrifice will not be held to the arrangement if they subsequently opt out of a pension scheme.

They will be entitled to a refund of the salary they sacrificed, subject to tax and National Insurance, returning them to their pre-sacrifice salary level.

Pension provider Friends Life, which lobbied for the change, says there was previously a real danger that by allowing employees to cancel a salary sacrifice arrangement the validity of the whole of a company’s sacrifice arrangement could have been called into question from a tax and NIC perspective.

Costs spread

As previously blogged on Payroll World here, if implemented correctly, salary sacrifice can be effectively used by employers to help meet some of the costs of automatic enrolment compliance.

Steve Herbert, head of benefits strategy at Jelf Employee Benefits, said the change was sensible and necessary.

“Historically most pension scheme membership has required action on the part of the employee, whereas auto-enrolment actually requires the employee to take no action whatsoever to obtain scheme membership,” he said.

“Inevitably therefore, some employees will end up joining a pension scheme and salary sacrifice arrangement without a full understanding of the contract they have entered into. Giving all parties some latitude to correct this situation without financial loss is clearly important.

“However, this ruling does not mean that salary sacrifice is suitable for all. Employer’s should still seek advice on implementing salary sacrifice, particularly for the low paid.”

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