Making the most of salary sacrifice

A salary sacrifice is where an employee contractually agrees to give up the right to part of their cash remuneration, usually in return for a non-cash benefit. A salary sacrifice arrangement offers a great tool to employers to attract and retain key employees.

In order to be effective for tax and NIC purposes, it is important to ensure that the salary is formally waived before the individual is entitled to the payment, ie before they are due to be paid.

If an employee wants to opt in or out of a salary sacrifice arrangement, the employer must alter their contract with each change. The contract must be clear on what their cash and non-cash entitlements are at any given time. If the contract is amended for reasons beyond the control of the parties, the transitional provisions are maintained. Also, a variation is ignored if it is in connection with the employee’s entitlement to statutory maternity pay, statutory adoption pay, statutory paternity pay, statutory shared parental pay or statutory parental bereavement pay.

HMRC has published guidance on salary sacrifice. It highlights:

• What is a salary sacrifice?
• What is the role of HMRC?
• When is salary sacrifice effective?
• When is salary sacrifice not effective?
• What information does an employer need to provide to HMRC?

Changes from 6 April 2017 mean that the income tax and NICs advantages of benefits in kind provided through salary sacrifice arrangements are largely withdrawn. However, there are exemptions for valuation and reporting to HMRC for a salary sacrifice arrangement for:

• payments into pension schemes
• employer provided pensions advice
• workplace nurseries
• childcare vouchers and directly contracted employer-provided childcare that started on or before 4 October 2018
• bicycles and cycling safety equipment (including cycle to work).

Other taxable benefits such as private health insurance are normally reported on P11D form after the end of the tax year. More details on how and when to complete P11D can be found within this technical factsheet.

The salary sacrifice changes took effect from 6 April 2017. The existing salary sacrifice contract at that date became subject to the new rules in respect of those contracts at the earlier of:

• 6 April 2018
• any end, change, modification or renewal of the contract; or
• for cars, vans and fuel, accommodation and school fees, 6 April 2021.

Salary sacrifice is commonly used to revitalise the pension pot, but it can be used for some other benefits such as bikes, mobile phones and bus passes.

What to watch out for

However, before entering into such arrangements, employees must consider that:

• a lower salary can affect entitlements like maternity/paternity pay, mortgage applications based on your income and additional state pension entitlements
• this is not affecting their pay increases, bonuses or pension benefits.

A salary sacrifice arrangement must not reduce an employee’s cash earnings below the National Minimum Wage (NMW) rates. Employers must put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.

More detailed guidance with examples is provided within HMRC manual EIM42750.