Secretary of State for Work and Pensions v NC

A valid salary-sacrifice arrangement under which an employee contractually gives up an entitlement to cash pay in exchange for an employer pension contribution means that the sacrificed sum is not the employee’s earnings. It is a payment in kind and is excluded under regulation 95(2) of the Employment and Support Allowance Regulations 2008.

The contribution is made by the employer, not paid by the employee. Accordingly, the sacrificed sum is not also subject to the one-half pension-contribution deduction in regulation 96(3)(b). This construction avoids any double or 150% deduction.

The Secretary of State appealed against a First-tier Tribunal decision of 21 November 2022 concerning entitlement to employment and support allowance while undertaking exempt work.

The claimant worked at an Amazon warehouse and participated in an occupational-pension salary-sacrifice scheme. His payslips recorded a weekly amount of £6.55 as “EE Pension Salary Sacrifice”. The parties agreed that his earnings exceeded the applicable £140 weekly limit during his first two weeks of employment, and that a Christmas bonus also affected one week.

The issue was whether the salary-sacrificed amount formed part of earnings under the Employment and Support Allowance Regulations 2008, or was instead an employer pension contribution made in return for the claimant giving up cash pay.

1. Appeal dismissed. The First-tier Tribunal made no material error of law and its decision was upheld.

2. A salary-sacrifice pension arrangement is not properly characterised as an employee authorising a deduction from earned pay and paying that amount into a pension. Its essential feature is a contractually valid agreement by which the employee gives up an entitlement to cash salary in exchange for an employer contribution to the occupational pension.

3. The judge followed the analysis in R(CS) 9/08. Although that decision concerned different regulations, the same principles applied. The £6.55 amount therefore never formed part of the claimant’s earnings for regulation 95(2) of the Employment and Support Allowance Regulations 2008.

4. As the sacrificed amount was excluded from gross earnings, regulation 96(3)(b) did not require a further deduction. The pension payment was an employer contribution, not a sum paid by the claimant. The Secretary of State’s suggested 150% deduction could not arise.

5. The claimant remained ineligible for allowance only for the conceded weeks in which his actual earnings, or the Christmas payment, exceeded the permitted-work limit.

• Upper Tribunal (Administrative Appeals Chamber): dismissed the Secretary of State’s appeal and upheld the First-tier Tribunal decision: [2024] UKUT 251 (AAC).
• First-tier Tribunal (Social Entitlement Chamber): on 21 November 2022 allowed the claimant’s appeal, set aside the Secretary of State’s decision, and decided that the claimant was not ineligible for employment and support allowance because of earnings except in the specified weeks.