Employers should be allowed to pay employees less than the minimum wage to allow them to be included within salary sacrifice arrangements, say Royal London policy director Steve Webb.
Webb and Southampton-based IFA firm Radcliffe & Co are calling for changes to the rules around salary exchange for pensions so they do not exclude low-paid workers.
First Actuarial director Henry Tapper says salary sacrifice could also be used as a way round the ‘net pay’ problem whereby those earning above the auto-enrolment threshold but less than the income tax threshold do not get tax relief.
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 the worker and the firm.
Royal London and Radcliffe’s say it is not fair that it is illegal for employers to offer salary sacrifice arrangements to workers paid at National Living Wage, currently £7.50 per hour for the over 25s, equating to an annual salary of £13,650 for a 35 hour week, 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.
The number of workers affected by the National Living Wage is rising rapidly and HM Treasury estimates that around 2.9 million workers will be on this wage rate by 2020.
Webb has written to the Secretary of State for Business, Energy & Industrial Strategy, Greg Clark MP, calling for a review of the rules.
Webb says: “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’.
Radcliffe’s independent financial adviser Marc Cumberlege says: “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.”
First Actuarial director Henry Tapper says: “Many of those on low earnings are not only unable to exchange salary for pensions, but unable to get the Government Incentive – basic rate tax relief – because they are in net pay schemes.
“Salary sacrifice/exchange gets round the net pay problem as all employees are treated equally – whether RAS or net-pay, tax-payers or below the income tax threshold.
“I would suggest that if it we were to make it easier for employers to offer salary-sacrifice to the low paid, we might go a great way to solving the net-pay problem.”