EIM42750 - Salary sacrifice: what is a salary sacrifice: arrangement of guidance
Section 62 ITEPA 2003
A salary sacrifice happens when an employee gives up the right to part of the cash remuneration due under his or her contract of employment. Usually, the sacrifice is made in return for the employer’s agreement to provide the employee with some form of non-cash benefit. The sacrifice is achieved by varying the employee’s terms and conditions of employment relating to remuneration. For example, an employee’s current contract provides for cash remuneration of £40,000 a year with no benefits. The employee agrees with the employer that for the future the employee will be paid cash remuneration of £34,800 a year and 52 childcare vouchers a year, each with a face value of £100. This would be referred to as a salary sacrifice.
An employee may also sacrifice a one-off item such as a bonus.
In the past, the term salary sacrifice was mainly used to refer to the giving up of rights to future cash remuneration in return for the employer’s contributions to a registered pension scheme. Now it is used to describe any situation where an employee gives up a right to future cash remuneration in return for a benefit in kind.
Optional remuneration arrangements
From 6 April 2017, the Income Tax and NICs advantages where benefits in kind are provided through salary sacrifice arrangements (described in the legislation as ‘optional remuneration arrangements’) are largely withdrawn. For most benefits in kind which were subject to either a full exemption or a limited exemption, the exemption does not apply if the benefit is provided in conjunction with a salary sacrifice arrangement.
The earnings charge on the benefit in kind is based on the amount of salary given up, if this is greater than the earnings charge which would otherwise arise under the normal benefit in kind rules.
Guidance on optional remuneration arrangements from 6 April 2017 starts at EIM44000.
Transitional provisions apply for a limited period. For further details see EIM44030.
Certain benefits in kind are excluded from the changes. For further details see EIM44130.
Arrangement of guidance
| EIM Reference | Guidance |
|---|---|
| EIM42752 | Reason for salary sacrifice |
| EIM42753 | How changes to the employment contract are made |
| EIM42755 | Income tax effects of a salary sacrifice |
| EIM42760 | Conditions for successful salary sacrifice: summary |
| EIM42765 | Conditions for successful salary sacrifice: timing |
| EIM42766 | Conditions for successful salary sacrifice: entitlement to cash |
| EIM42767 | Conditions for successful sacrifice: right to revert to original salary |
| EIM42769 | Conditions for successful salary sacrifice: effectiveness of contractual arrangement |
| EIM42770 | Conditions for successful salary sacrifice: implementation of contractual arrangement: payslip information |
| EIM42771 | Conditions for successful salary sacrifice: implementation of contractual arrangement : reference or notional salary |
| EIM42772 | Approval of scheme: before the scheme is set up and in operation |
| EIM42773 | Approval of scheme: scheme set up and in operation |
| EIM42775 | Contributions to a registered pension scheme: practical considerations |
| EIM42776 | Salary sacrifice: is the sacrifice effective: frequently asked question |
| EIM42777 | Salary sacrifice: implementation of contractual arrangement: other points to consider |
| EIM42778 | Salary sacrifice: other points to consider: application of the tax/NIC exemption |
| EIM42780 | Contributions to a registered pension scheme: income tax effects |
| EIM42785 | Contributions to a registered pension scheme: example of successful salary sacrifice |
| EIM42786 | Contributions to a registered pension scheme: example of unsuccessful salary sacrifice |
| EIM42790 | Salary sacrifice: example of an unsuccessful sacrifice |