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Salary sacrifice on pensions

Salary sacrifice on pensions

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We have a new client who has had pensions incorrectly processed through the payroll for more than four years.  These are individual schemes that reclaim the tax on employee contributions and which are topped up with employer contributions.  It is difficult to talk to the pension scheme, because of data protection on each individual scheme.  I have seen an employee statement confirming the scheme is claiming tax back.

The employee's contributions have been matched with a salary sacrifice, whereas the pension scheme has been set up with tax relief reclaimed by the scheme, so effectively the tax relief has been claimed twice.

Over the years several employees have left and, of course, previous tax years are closed.  I have stopped the salary sacrifice on appointment, so the pension deductions match the pension scheme treatment.

My problem though is how to go about rectifying previous years.  Has anyone had any experience in negotiating a settlement with HMRC or is there any other method of getting this resolved?

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Euan's picture
By Euan MacLennan
06th Nov 2015 14:34

Are you sure?

raybackler wrote:

The employee's contributions have been matched with a salary sacrifice

The employee is already paying his pension contributions by deduction of his net contribution from his net pay.  Normally, any salary sacrifice would be in respect of the employer's contribution - a quid pro quo for the employer incurring the cost of the employer's contribution.

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By raybackler
10th Nov 2015 08:43

Yes, I'm sure

An example would be employer's contribution £40, employee's £30, so total paid to pension scheme £70 and these amounts appear on the employee statement.  In all cases the salary sacrifice matches the employee deduction.  Maybe this is the error though and the sacrifice should have been the employer's contribution.  I am trying to find out more.

Thanks for your contribution.

 

 

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Euan's picture
By Euan MacLennan
10th Nov 2015 10:19

Please clarify
Is the "employee statement" something from the pension company or a payslip?What is being deducted on the payslip?  £30 from gross pay before tax (the normal treatment of a salary sacrifice)?  £30 from net pay after tax (the normal treatment of an employee net pension contribution, suggesting that 'salary sacrifice' is a misnomer)?  £70 - from gross or net pay?

Incidentally, I assume that your £40/£30 is just an example.  A gross contribution of £40 would normally suggest and employee net contribution of £32.

 

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By raybackler
10th Nov 2015 10:31

Clarification

The example I have given was from one of the employees.  It was £70 in total, shown on the pension company employee statement as £30 employee and £40 employer.  It is a stakeholder scheme and the pension company statement for the employee also shows tax of £7.50 being recovered to increase the employee contribution to £37.50.  This means each month the scheme receives £77.50, £70 from the employer and £7.50 in tax.

The employee payslip shows £40 as the employers contribution and a salary sacrifice of £30 deducted from gross pay, instead of showing an employee contribution from net pay, which is what I would expect.

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Euan's picture
By Euan MacLennan
10th Nov 2015 10:53

Blood from stones!

I will have another go!

What does the payslip show the employer contribution of £40 as?  Just a memo, a deduction from gross pay or a deduction from net pay?

However, on the basis of what you have disclosed so far, the employee has been given tax relief twice - £7.50 correctly by the pension scheme and another £6 (20% of £30) incorrectly by the employer through PAYE.  You should not have cancelled the salary sacrifice of £30 - you should have changed it to an employee pension contribution of £30 deducted from net pay to get it right for the future.

As for the past, I would forget it.  The employees, whether they have left or not, have always accepted the deduction of the 'salary sacrifice' from their gross pay, whether they understood it or not, and on that basis, have been taxed correctly under PAYE.

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By raybackler
10th Nov 2015 11:19

Sorry Euan

I thought I had been clear enough.  The payslip shows the employer contribution as exactly that with no effect on gross pay and not shown as a deduction, so it is memo only.

I agree with your opinion that tax relief has been given twice.  When I cancelled the salary sacrifice, I did re-instate employee deductions from net pay to get it right for the future. 

My concern was not with the employees, as I agree they have always accepted the situation.

My concern is with HMRC, who are not seeing a deduction from net pay on something where they are giving tax relief to the pension scheme.

 

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