Pension provider Royal London and a financial adviser are calling on the government to amend legislation which currently sees low paid workers miss out on the benefits of salary sacrifice.
Salary sacrifice or exchange allows employers and employees to benefit from lower national insurance contributions (NICs).
Under a ‘salary exchange’ deal, a worker and an employer come to an arrangement whereby pension contributions are made wholly by an employer rather than split between employer and employee.
Under normal circumstances, any money paid in wages is subject to employer and employee NICs, even if it is then paid by the worker into a pension scheme.
But if all the pension contributions go directly from the firm into the pension rather than via the worker, this reduces the total NICs bill, to the potential benefit of both worker and firm.
The way that such schemes work in practice is that a worker will ‘sacrifice’ or ‘exchange’ part of their salary and in return the employer will make a pension contribution on behalf of the worker.
Such schemes are increasingly commonplace, particularly among larger employers.
But Royal London and IFA firm Radcliffe & Co argue this doesn’t work for those on lower wages.
If an employer offered salary sacrifice to someone on the National Living Wage it would be illegal because it would take the worker’s pay below the legal minimum.
The National Living Wage is currently £7.50 an hour for the over-25s or £13,650 a year for a 35-hour week.
HM Treasury estimates that around 2.9m workers will be on the national living wage rate by 2020.
Sir Steve Webb, director of policy at Royal London has written to Greg Clark, Secretary of State for Business, Energy & Industrial Strategy, calling for a review of the rules.
He said: “Given that the Treasury has specifically decided that employer pension contributions should continue to benefit from salary sacrifice arrangements, it seems unfair that lower-paid workers are currently missing out.
“National Living Wage legislation was designed to benefit lower-paid workers and it is doubtful whether the interaction with salary sacrifice was seriously considered when the legislation was drawn up.
“Having written to the Government about this issue I hope that they will change the rules and allow lower-paid workers to share in the benefits of these arrangements.”
As an example, Sir Steve pointed to the fact people on the living wage can be paid less if they get free accommodation meaning there could be flexibility so minimum wage workers can benefit from pensions salary sacrifice as well.
But he said they would need to be free to opt out of this if they wished.
Marc Cumberlege, and adviser at Radcliffe’s & Co, said: “This is not just a theoretical issue. I have come across employers who want to deliver high quality pension provision to their staff in a cost-effective way and risk falling foul of minimum wage legislation if they do so.