Minister urged to allow low-paid to share in benefits of salary exchange for pensions

17 November 2017

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 National Insurance Contributions (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.

Royal London and Radcliffe’s have requested a review of the rules as the way they currently work prevents lower-paid workers from benefiting. The National Living Wage is currently set at £7.50 per hour for the over 25s, equating to an annual salary of £13,650 for a 35 hour week.  If a worker is paid at this level it appears that it is illegal for the employer to offer a salary sacrifice arrangement for pensions, even if this would be to the financial advantage of the worker. This is because it would take the worker’s pay below the level of the national living wage.

Royal London’s Director of Policy, Steve Webb, has now written to the Secretary of State for Business, Energy & Industrial Strategy, Greg Clark MP, calling for a review of the rules.   Steve Webb 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.”


Marc Cumberlege, an Independent Financial Adviser at Radcliffe’s 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.  Salary exchange arrangements can be mutually beneficial to workers and employers alike and should be available to all.”