Teresa Dolan: How salary sacrifice fits with auto-enrolment

To offset some of the costs of pensions auto-enrolment, many employers plan to introduce a salary sacrifice arrangement for employee contributions to take advantage of the employer national insurance (NI) savings that result from this.

Initially, there had been some concern over how salary sacrifice would interact with auto-enrolment requirements, given the apparent conflict between the need for permanent changes under salary sacrifice rules and the statutory right to opt out of auto-enrolment.

However, HM Revenue and Customs guidance has confirmed that an employer can use salary sacrifice in connection with auto-enrolment, although it cannot force an employee who is eligible to be automatically enrolled to enter into a salary sacrifice plan.

Where an employer plans to introduce a salary sacrifice arrangement, care must be taken over when and how it is implemented to ensure it is valid and implemented in a way that is consistent with an employer’s auto-enrolment duties. The employer will also need to have an effective communication strategy in place to ensure employees understand what is happening, and are aware of their right to opt out of salary sacrifice and/or auto-enrolment.

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Employers with existing salary sacrifice arrangements in connection with their pension scheme should review these to ensure they are consistent with auto-enrolment requirements. They may also want to extend any such arrangement to cover staff they are required to auto-enrol into their pension scheme.

Teresa Dolan is an employment partner at Eversheds