Salary Sacrifice & Parental Leave

Claire Vane
November 16, 2021

Maji is a very neat piece of software which is low cost but delivers maximum output in terms of value given to the employee.  I rarely become excited about an app but this one is really clever.

It’s an app which makes sense of pensions and helps employees with their financial health. 2/3rds of employee stress is now linked to money problems, and 77% of people currently report they don’t understand their pension enough to make decisions about their future. So financial wellbeing and supporting employees with pension engagement is an area lots of employers should be considering.

One way Maji helps companies and their employees get more out of the workplace pension is by switching them over to HMRC’s salary sacrifice arrangement. This results in employer tax savings of up to £1,300 per employee per year, and savings for employees of up to £600 per year. Maji’s employee workshops, educational material and app interface help employees understand more about their pension, including salary sacrifice. It’s a no-brainer, and with Maji, employers and their staff can start making savings within one payroll cycle.

In addition, Maji enables employees to:

  • Track all of their pension and bank accounts in one place

  • Make changes to their pension contribution rate at the touch of a button

  • Get a financial health check and personal coaching plan for how to improve their financial wellbeing

  • Create a financial plan and share this with a money coach or financial advisor for a 1-1 review‍

A lot of employers have questions about how salary sacrifice affects parental leave, and below I’ve listed and answered a number of key queries. The information provided also offers a useful vehicle for refreshing people’s minds on employment law issues in relation to family friendly legislation, such as parental leave, and will give the opportunity for HR departments to look forensically at their policies and procedures in handbooks and on their portals, where applicable.

Q. If an employee is on any kind of parental (maternity or paternity) leave, would they still receive an increment in salary and benefits?

A. In this scenario, an employer is required to treat absent employees as above, in just the same way as if they were present at work.  Any pay rises and improvements or changes in terms of conditions will be equally applicable to those not present and we can generally include that salary sacrifice is part of the terms and conditions of employment.  Therefore those on parental leave, for example, maternity and paternity leave, should receive the same benefits while they are off, rather than waiting for their return. The implication is that those on parental leave should still have the opportunity to opt into or remain in salary sacrifice if so wished.

Q. Is the amount of statutory parental leave calculated on the original salary or the post sacrifice salary (if somebody has opted for salary sacrifice) and is this decided by the employer or by the state?

A. Statutory Maternity Pay (SMP) is payable at

  • 90% of the employee’s Average Weekly Earnings before tax (AWE) for the first 6 weeks;

  • £151.97 or 90% of their AWE (whichever is lower) for the next 33 weeks.‍‍

Statutory Paternity Pay (SPP) is payable at the statutory weekly rate of £151.97, or 90% of their AWE before tax (whichever is lower).

There are statutory rules about how to calculate AWE. If an employee has entered into a salary sacrifice arrangement with their employer, then their AWE is calculated using the amount of earnings actually paid to them after the sacrifice but before tax during the relevant period.

Q. Does an employer have to pay pension contributions while someone is on parental leave?

A. Yes. The employer must continue to make pension contributions during paid Maternity Leave (Ordinary Maternity Leave to week 26 and Additional Maternity Leave weeks 27 to 39) and paid Paternity Leave. The employer must continue to make pension contributions after the statutory period only if it is in the contract of employment.

The amount the employer pays is based on the pensionable earnings that the employee would have received if they were not on parental leave. If the employee is not paid during maternity leave, the employer still has to make pension contributions in the first 26 weeks of maternity leave (‘Ordinary Maternity Leave’).

Q: If a staff member has opted for salary sacrifice and then goes on parental leave, would the employer have to continue to pay the pension contributions? If so, how are these calculated?

Under a salary sacrifice scheme, the employees’ pension contribution has become part of the employer’s obligation to pay. Legal consensus is that the salary sacrifice contribution constitutes a ‘non cash benefit’, which the employer is obligated to continue to pay during Ordinary and Additional maternity leave / Paternity leave.

In normal circumstances, the additional amount the employer puts into the employees’ pension as part of the salary sacrifice scheme, is recouped by taking the amount off the employee’s salary in exchange. And in fact, this would continue to be the case where an employee was given additional maternity / paternity pay beyond the statutory minimum.

However, where an employee is only collecting statutory payments for their maternity / paternity benefit, statutory payments cannot be reduced. As a result, during parental leave, it is recommended that the employer should continue to make the same level of pension contribution as under the original salary sacrifice arrangement, despite the fact that this must be done without getting remunerated in return.

There is some legal precedent (Peninsula versus Donaldson) that the employer could add a clause to the employment contract to specify that salary sacrifice will be suspended during parental leave, but any employers considering changes such as this should seek legal advice.

Q. Is it usually in the interests of the employee to opt in or out of salary sacrifice before going on parental leave?

A. Calculations will vary according to individual cases, so it is important not to generalise.

The first thing that should be considered is qualification for SMP/SPP in the first place. In order to qualify, an employee needs to have average weekly earnings of at least £120 pw (2021/22) in the 8 weeks (for weekly-paid employees) or 2 months (for monthly-paid employees) before the 15th week that the baby is due. For some people, opting into salary sacrifice could take their earnings below £120 a week, meaning they would miss out on SMP/SPP altogether if they were in salary sacrifice during the qualifying period.

If an employer is working with Maji to deliver their salary sacrifice scheme, this is not a concern, as Maji automatically opts employees out of the scheme if there is a risk of their earnings falling under the threshold.

The second thing to consider is whether taking part in salary sacrifice will reduce what they get paid during the first 6 weeks of SMP. For the first 6 weeks of SMP, the amount is paid at 90% of the AWE, but the AWE is calculated on the amount of salary left after the sacrifice has been taken. Therefore, the AWE will be reduced by salary sacrifice.  As a result, it could be in the employee’s interest to opt out of salary sacrifice during the qualifying period to maximise AWE.

Note that for Maternity Leave after the first six weeks, and Paternity Leave from the outset, the SPP/SMP is the lower of:

  • the statutory rate of SMP/SPP

  • 90% AWE.

Therefore, if 90% of an employees’ AWE would likely be in excess of the statutory rate of SMP/SPP, there would be no advantage to opting out of salary sacrifice during the qualifying period.  

Whilst salary sacrifice may reduce the amount of SMP paid for the first 6 weeks, there are benefits to the employee of remaining in the scheme. During Maternity/Paternity Leave, if an employee is in a salary sacrifice scheme, legal consensus is that the employer is obligated to continue to pay the employee’s pension contributions on their behalf. This can be of considerable value to an employee. Here’s a worked example of the pros and cons.

Scenario: Employee on London Living Wage rate of £10.85 per hour, works 40 hours per week and contributes 5% of qualifying earnings into the pension. The post salary-sacrifice wage for this employee would be £10.31 per hour. The employee is in the salary sacrifice scheme during the qualifying period.

Reduction in SMP for the first six weeks = £117 ((90% of £10.85 X 40 hours x 6 weeks)  - (90% of £10.31 X 40 hours x 6 weeks)).

Increase in pension contributions = £612 ((£10.85*40 hours minus the lower qualifying earnings band of £120) x 5% pension contribution x 39 weeks)).

Here, the employee’s pay for the first six weeks is lower, but they will benefit in the form of extra money in their pension.

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