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Getting it right: pension salary sacrifice rules during maternity leave
D espite recent proposed changes to pension salary sacrifice arrangements, they remain a popular way to offer enhanced pension incentives to employees, while also saving on labour costs. However, employers must be alert to several potential pitfalls to avoid creating unintended liabilities. Chief among these is ensuring that post-salary sacrifice pay doesn’t fall below the national minimum wage (NMW) rates. Yet another area, increasingly misunderstood, concerns the rights of employees during maternity leave. The legislative framework regarding maternity leave ensures employees aren’t penalised while on leave. Yet, where salary sacrifice schemes are involved, it creates an unintended consequence. Employers need to understand these risks, and the actions payroll and human resources teams should be taking to mitigate them. The legal framework The Equality Act 2010 (https:// ow.ly/5pui50YoaFw) introduces a “maternity equality rule” regarding occupational pension schemes, which requires employers to maintain pension contributions during maternity leave, including when they’re only paid statutory maternity pay (SMP). The Maternity and Parental Leave Regulations 1999 (the ‘MPL Regulations’), which can be found here: https://ow.ly/ i9Ce50YotoJ, state that during maternity
leave an employee must receive the benefit of all contractual terms and conditions except remuneration. This means that they must continue to receive their benefits as usual, but not their pay, while on maternity leave. They’re only entitled to SMP during their maternity leave, unless the employer offers an enhanced sum. Crucially, the pension contribution made by the employer is treated as a benefit. Pension contributions during paid maternity leave Under a normal pension arrangement where there’s no salary sacrifice scheme, during the paid maternity leave period (which can be up to a maximum of 39 weeks), the employer must continue to pay employer pension contributions based on the employee’s normal salary, i.e., as if the employee wasn’t on maternity leave. By contrast, the employee’s pension contributions are calculated based on the pay actually received during maternity leave. So, if the employee is only entitled to SMP, their employee pension contributions will be based on 90% of their normal earnings for the first six weeks, and for the next 33 weeks, they’ll be based on the current rate of SMP or 90% of their normal earnings, whichever is lower. The impact of salary sacrifice Under a salary sacrifice pension arrangement, the employee contractually
agrees to reduce their gross salary, and the amount deducted is exchanged for an additional employer pension contribution. The advantage of this is that the employee won’t pay tax or employee National Insurance contributions (NICs) on the amount exchanged, and instead this is all paid into their pension scheme. The employer also saves the employer’s NICs on this sum. The practical effect is that under a pension salary sacrifice arrangement, all contributions are treated as employer contributions. There’s no separate employee contribution. Because employer contributions must be calculated based on the employee’s normal salary, the full contribution, including the amount sacrificed, must continue. If employers elected to opt employees out of the salary sacrifice arrangement either prior to or during maternity leave, to avoid having to pay the enhanced employer pension contributions, they may expose themselves to claims of sex and / or maternity discrimination. What’s the entitlement during any unpaid maternity leave? Statutory maternity leave may extend to 52 weeks. SMP, however, is payable for up to 39 weeks. For the final 13 weeks, there’s no legal obligation to pay the employee. The legal position concerning the entitlement to pension contributions during unpaid maternity leave is unclear. Under the MPL Regulations, an employee
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