Salary sacrifice pension arrangements-Isle of Man occupational pension schemes

Under a salary sacrifice pension arrangement, an employee voluntarily gives up the right to receive part of their salary or wages by altering the terms of their contract of employment.

The sacrifice is made in return for the employer agreeing to provide a pension contribution into the employees’ pension fund.

An element of the employee’s sacrificed remuneration redirected into their pension scheme is a forgoing of their salary and is not a personal pension contribution on which they can claim personal tax relief.

The forgone salary is paid into the employees’ pension scheme by the employer and as such becomes an employer’s contribution.

The National Insurance contributions paid by both the employee and employer will be reduced to reflect the reduction in salary or wages, as will the tax paid by the employee.

Approval required before commencing salary sacrifice pension arrangement

A new contract of employment must be set up for the salary sacrifice claim to be valid.

Should the employer wish to cancel the arrangement, the Division should be contacted in order to clarify the income tax position.

Any arrangement that is entered into without approval will be considered to be void and the arrangement will be unpicked back to the position prior to the salary sacrifice.

Conditions

To enter into such an arrangement the following conditions must be met:

• The pension scheme should be able to accept employer pension contributions
• The contract of employment between the employee and the employer must be changed well in advance of the date on which the first payment is due to be made to the employee, in order to demonstrate that the employee has agreed to give up the right to receive the original higher amount of salary
• The revised contract of employment must show that the wage or salary has genuinely and permanently been reduced in exchange for the provision of a pension contribution by the employer
• The amended contract of employment cannot let the employee opt in or out of the arrangement. The employment contract must be changed for a minimum of one year and the salary sacrifice claim must be agreed and signed off by the employers section of the assessor’s office in order to make that claim valid

Approval should be sort from the Income Tax Division prior to entering into such an arrangement.