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HMRC U-turn will protect staff using salary sacrifice for pensions, post auto-enrolment legislation

HM Revenue & Customs has changed its guidance to ensure that those taking part in salary sacrifice schemes won't lose out when auto enrolment kicks in.

The salary sacrifice guidance change, lobbied for by Friends Life, means workers opting out of auto-enrolment cannot be left out of pocket.

The change, confirmed by HMRC, also provides much needed clarity to employers about the validity of salary sacrifice arrangements being used to meet auto-enrolment obligations. Prior to the change, those auto-enrolled via a salary sacrifice arrangement might have lost out financially.

Under salary sacrifice, an employee agrees to a contractual reduction in salary in exchange for an enhanced employer pension contribution, delivering National Insurance Contribution (NIC) savings for both the employee and employer and helping reduce the financial burden of auto-enrolment obligations. Whilst opting out of the company pension is allowed, cancelling a salary sacrifice arrangement (unless due to a lifetime event) is not currently permitted. This means the employee may not be entitled to the refund of the salary sacrificed despite the cessation of pension scheme contributions.

For employers this meant there was a danger by allowing employees to cancel a salary sacrifice arrangement the validity of whole of the company's sacrifice arrangement could have been called into question from a tax and NIC perspective.

Following questions raised by Friends Life directly with HMRC and via the Association of British Insurers (ABI), HMRC has confirmed that its guidance on salary sacrifice will be changed. Employees auto-enrolled via salary sacrifice will not be held to the arrangement if they subsequently opt out of the pension scheme and 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 and ensuring they are not left out of pocket.

Martin Palmer, head of corporate benefits marketing at Friends Life, said: "Employers have been telling us that auto-enrolment and salary sacrifice needed to be compatible to make arrangements simpler and more workable for them as they engage with the new pensions legislation. The clarification we've received from HMRC that salary sacrifice guidance will be changed is great news. It's also a commonsense move that ensures consumers won't be left out of pocket if they decide not to remain in their employer's scheme."

"Salary sacrifice is an effective and efficient means of helping employees participate in their company pension schemes and this change ensures it remains so."

James Biggs, head of corporate pensions, workplace savings at Lorica Employee Benefits, added: "Thank heavens someone has had the presence of mind to deal with this anomaly. It's a top effort by those that lobbied and the right end result. Most of our clients use salary sacrifice/exchange and will continue to do so throughout auto-enrolment. They will be most relieved about this."