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
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:-
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.