Reply to: Employer's pension contribution from umbrella company

[barani76]

I was re-inventing the wheel, doing th same thing Fred Scuttle was doing. having my own umbrella company to pay into pensions by salary sacrifice.

Looking at the discussions, did people figure out how to work out a salary sacrifice scheme. If the the employee instructs the company to transfer money to pension scheme is not correct, can it not be done at all.

[expat]

....

PS I came across this (and realised that I hadn't replied) in the course of looking through past posts on pensions, and I'd like to add that I appreciate some of the posts you've made.

[expat]

I agree that is salary sacrifice, assuming you initially had a contract of employment under which your employer was legally obliged to pay you 20K salary. When you agreed to change things, you agreed to change the contract.Assuming this is what you mean, then I think you are agreeing that expat is right, that if you just ask your employer to pay a chunk of money into a pension instead of salary, without formally varying the contract of employment, that is not salary sacrifice, because it is at your discretion/direction that the payment is made, and not because of a binding legal obligation.I think you are a little confused here. An employee contribution is never a salary sacrifice contribution. A salary sacrifice contribution is an employer contribution that the employer makes in return for being allowed to pay you less salary. Not all employer contributions are salary sacrifice contributions. My wife gets a minimum employer contribution of 5% of salary even if she has 0% salary sacrifice
There's no problem with your employer making contributions you weren't contractually entitled to - this is like giving you a bonus or a pay rise. The problem with employer contributions only potentially occurs when the contribution is linked to a cut in salary. I assumed the problem wasn't relevant to contractor directors because we don't (usually) have contracts of employment to be varied. I'm waiting for expat to throw further light on why he disagrees.

Apologies for not replying.

I take your point about directors not having a contract to vary in the first place. Perhaps I am being overly cautious (or just plain wrong), but it does seem to me that:
1. although the employer can make employer pension contributions any time;
2. if the employer makes a pension contribution at the same time as paying less salary by a corresponding amount, that is liable to be taken by HMRC as being not an employer contribution but an employee contribution executed by the employer on the employee's behalf;
3. but if this (no. 2) is a proper "salary sacrifice" then it is accepted as an employer contribution.

The difference of course being that an employee contribution is liable to NICs.

[ASB]

There's no problem with your employer making contributions you weren't contractually entitled to - this is like giving you a bonus or a pay rise. The problem with employer contributions only potentially occurs when the contribution is linked to a cut in salary. I assumed the problem wasn't relevant to contractor directors because we don't (usually) have contracts of employment to be varied. I'm waiting for expat to throw further light on why he disagrees.

The penny has - finally - dropped.

[IR35 Avoider]

To me what seems to be said is - by example:-

You agree a 20k salary. Then you agree that the employER will make 15k of pension contributions and you will only have a 5k salary.

I agree that is salary sacrifice, assuming you initially had a contract of employment under which your employer was legally obliged to pay you 20K salary. When you agreed to change things, you agreed to change the contract.

but you can't agree a 5k salary and the employer then also contributes 15k to your pension fund.

Assuming this is what you mean, then I think you are agreeing that expat is right, that if you just ask your employer to pay a chunk of money into a pension instead of salary, without formally varying the contract of employment, that is not salary sacrifice, because it is at your discretion/direction that the payment is made, and not because of a binding legal obligation.

Certainly the 10% my employer contributes for me is nothing whatsoever to do with salary sacrifice. But the 5% contributed as the employee contribution is salary sacrifice. It affects the NI treatment of this portion of the salary, that is all.

I think you are a little confused here. An employee contribution is never a salary sacrifice contribution. A salary sacrifice contribution is an employer contribution that the employer makes in return for being allowed to pay you less salary. Not all employer contributions are salary sacrifice contributions. My wife gets a minimum employer contribution of 5% of salary even if she has 0% salary sacrifice

I don't beleive there is anything whatsoever stopping my employer from making additional employee contributions if it feels like it. [When still contracting I used to do this all time when I had spare cash in the company, never had any problems - but that doesn't mean it was correct of course.]

There's no problem with your employer making contributions you weren't contractually entitled to - this is like giving you a bonus or a pay rise. The problem with employer contributions only potentially occurs when the contribution is linked to a cut in salary. I assumed the problem wasn't relevant to contractor directors because we don't (usually) have contracts of employment to be varied. I'm waiting for expat to throw further light on why he disagrees.

[ASB]

I think expat is making a more subtle point than you've appreciated, and he may be right. My wife has used salary sacrifice to reduce her taxable salary and get bigger pension contributions from her employer. Each year in February she has to tell them what percentage of her nominal salary she wants to sacrifice, that then applies to the whole of the subsequent financial year and cannot be changed. Although this could be purely to ease admin, I think it is really because of the sort of legal issues expat is talking about.

Edit: what would be really interesting is whether the agreement could be of the form, pay me up to X in salary over the year, and pay any surplus fee I generate into a pension. This would probably suit contractors working through an umbrella company better than specifying a percentage, and I can't see why it wouldn't be acceptable.

To me what seems to be said is - by example:-

You agree a 20k salary. Then you agree that the employER will make 15k of pension contributions and you will only have a 5k salary.

but you can't agree a 5k salary and the employer then also contributes 15k to your pension fund.

Certainly the 10% my employer contributes for me is nothing whatsoever to do with salary sacrifice. But the 5% contributed as the employee contribution is salary sacrifice. It affects the NI treatment of this portion of the salary, that is all.

I don't beleive there is anything whatsoever stopping my employer from making additional employee contributions if it feels like it. [When still contracting I used to do this all time when I had spare cash in the company, never had any problems - but that doesn't mean it was correct of course.]

[IR35 Avoider]

Re your previous post, yes I meant in the case of running you r own Ltd Co. That's what I meant when I said that it had an element of farce (you as director write a letter to you as employee, detailing the company's new pension scheme; you as employee reply accepting the salary deduction in writing...). I thought it was amusing whan I did that, but my accountant took it with a straight face.

This is news to me, and I'm a bit skeptical. If you're right, then the PCG needs to update their advice on pensions urgently. Why did you come to the conclusion that this was necessary?

Are you sure that the fact I pay myself a salary means I have a contract of employment? That contradicts the consensus view here and at the PCG that directors don't have to pay themselves the minimum wage.

[expat]

I think expat is making a more subtle point than you've appreciated, and he may be right. My wife has used salary sacrifice to reduce her taxable salary and get bigger pension contributions from her employer. Each year in February she has to tell them what percentage of her nominal salary she wants to sacrifice, that then applies to the whole of the subsequent financial year and cannot be changed. Although this could be purely to ease admin, I think it is really because of the sort of legal issues expat is talking about.

Quite so. It is important to sacrifice the salary, i.e. to give up any right to spend it as you choose. Obviously if you own the company it is rather moot, since you could change the arrangement any time you want, but it helps to document the process.

Re your previous post, yes I meant in the case of running you r own Ltd Co. That's what I meant when I said that it had an element of farce (you as director write a letter to you as employee, detailing the company's new pension scheme; you as employee reply accepting the salary deduction in writing...). I thought it was amusing whan I did that, but my accountant took it with a straight face. In your case you have little salary to sacrifice, but I guess no NICs on most of your money anyway so the salary sacrifice question doesn't apply to you (it's only important for the NIC aspect).

[IR35 Avoider]

Any company can still make one off employer contributions into an authorised pension (if they can be bothered and the pension will allow it). There is no rule that fixes them to any level. Indeed all final salary based schemes normally have highly irregular employer contributions.

Salary sacrifice applies to employee contributions and can help in improving employer NI bills and also can potentially help if large contributions are being made.

I think expat is making a more subtle point than you've appreciated, and he may be right. My wife has used salary sacrifice to reduce her taxable salary and get bigger pension contributions from her employer. Each year in February she has to tell them what percentage of her nominal salary she wants to sacrifice, that then applies to the whole of the subsequent financial year and cannot be changed. Although this could be purely to ease admin, I think it is really because of the sort of legal issues expat is talking about.

Edit: what would be really interesting is whether the agreement could be of the form, pay me up to X in salary over the year, and pay any surplus fee I generate into a pension. This would probably suit contractors working through an umbrella company better than specifying a percentage, and I can't see why it wouldn't be acceptable.

[IR35 Avoider]

IR35Avoider, even if you are on salary from YourCo, you have an impled contract of employment. If you intend to agree with YourCo that they will invest what would otherwise have been some of your salary in a pension, you should get a written agreement with YourCo in advance that this will be done. An exchange of letters is usually sufficient.

I'm completely mystified by this statement - are you assuming I'm with an umbrella? I have my own company and pay myself less than the National Minimum Wage, which I believe I'm allowed to if I'm a Director with no contract of employment.

[ASB]

So you would think. But if the individual sum of money is disbursed on your direct instruction, you have not sacrificed the salary, you have spent it. That applies even if you got the employer to do the actual disbursement for you.

Salary sacrifice doesn't mean that you have spent it, it means that you have given up in advance the right to spend it as you please.

IR35Avoider, even if you are on salary from YourCo, you have an impled contract of employment. If you intend to agree with YourCo that they will invest what would otherwise have been some of your salary in a pension, you should get a written agreement with YourCo in advance that this will be done. An exchange of letters is usually sufficient.

I know that this has an element of farce, but it provides a paper trail. Much more convincing than just saying later to Hector, "Oh yeah, but I meant that to be a salary sacrifice".

Any company can still make one off employer contributions into an authorised pension (if they can be bothered and the pension will allow it). There is no rule that fixes them to any level. Indeed all final salary based schemes normally have highly irregular employer contributions.

Salary sacrifice applies to employee contributions and can help in improving employer NI bills and also can potentially help if large contributions are being made.

[expat]

My plan was to avoid being paid this month and so the money that would have gone towards my salary would be directed to my SIPP instead. Surely this means I would be sacrificing my salary for that month?

So you would think. But if the individual sum of money is disbursed on your direct instruction, you have not sacrificed the salary, you have spent it. That applies even if you got the employer to do the actual disbursement for you.

Salary sacrifice doesn't mean that you have spent it, it means that you have given up in advance the right to spend it as you please.

IR35Avoider, even if you are on salary from YourCo, you have an impled contract of employment. If you intend to agree with YourCo that they will invest what would otherwise have been some of your salary in a pension, you should get a written agreement with YourCo in advance that this will be done. An exchange of letters is usually sufficient.

I know that this has an element of farce, but it provides a paper trail. Much more convincing than just saying later to Hector, "Oh yeah, but I meant that to be a salary sacrifice".

[Fred_Scuttle]

In order to answer malvolio’s question, I’ve asked my umbrella company if they can make an employer’s contribution but they don’t know if it’s possible. They’ve asked their accountant to look into it. Seems to be taking a while though.

Expat…. I was interested to read your comments on the topic. My plan was to avoid being paid this month and so the money that would have gone towards my salary would be directed to my SIPP instead. Surely this means I would be sacrificing my salary for that month? From what you say, and I’m not surprised, this is all loosely defined so that HMRC can twist it so that they can squeeze as much money out us.

IR35 avoider …. With my limited knowledge this would have been my understanding in that my umbrella is my employer and so can make employer contributions. I think they’re OK about making the contribution but want to make sure that it’s within the law. Trouble is getting a definitive answer is difficult.

[IR35 Avoider]

If they make a one-off payment, they are merely spending your money for you according to your instructions. Therefore it is not an employer's pension contribution, but an employee's pension contribution executed by the employer on the employee's behalf; it attracts income tax relief but does not avoid NICs.

For it to be an employer's pension contribution, it has to involve salary sacrifice. That is, you have to sacrifice the right to that salary. How you do that is not clearly defined (surprise!) and HMRC are unclear about it, because it forms part of employment law, not tax law. But in short, if you have a contract for a certain salary, and then you make a written agreement with the employer to pay a fixed amount per month into a SIPP instead of in salary, this is likely to be accepted. If you get them to make a one-off payment at your discretion, the question is rather, will you get away with it?

If you set up your own company and move your contract to it, you won't have to have a contract of employment so won't have to worry about salary sacrifice issues.

However, whatever issues there may be, the umbrella company is just an employer like any other, and will be able to make employer contributions, if they can be bothered with the admin. I suspect the only option they will offer you is to contribute to a scheme they've set up, if they have one.

[expat]

I contract using an umbrella company and I would like them to make an employer's pension contribution into my SIPP from the gross amount that I earn this month after deducting travel expenses. This would be a one off payment. Therefore this month I would receive no salary.

Can this be done? Is it legal?

The way I see it is that they are my employer and so an employer's pension contribution is perfectly legal. Using this method would save me from paying NI (EE and ER) which I would have to pay if I made a personal contribution.

If they make a one-off payment, they are merely spending your money for you according to your instructions. Therefore it is not an employer's pension contribution, but an employee's pension contribution executed by the employer on the employee's behalf; it attracts income tax relief but does not avoid NICs.

For it to be an employer's pension contribution, it has to involve salary sacrifice. That is, you have to sacrifice the right to that salary. How you do that is not clearly defined (surprise!) and HMRC are unclear about it, because it forms part of employment law, not tax law. But in short, if you have a contract for a certain salary, and then you make a written agreement with the employer to pay a fixed amount per month into a SIPP instead of in salary, this is likely to be accepted. If you get them to make a one-off payment at your discretion, the question is rather, will you get away with it?