A salary sacrifice arrangement is a formal agreement under which an employee accepts that with effect from a set date, they will receive a lower taxable salary than previously, and also receive an agreed non-cash benefit in kind (BIK) or package of BIKs. Agreements must apply for a minimum period, usually for at least one year.
The two key elements necessary for a salary sacrifice to work are that:
- the entitlement to future remuneration must be given up before it is treated as received for tax or NICs purposes
- the true construction of the revised contractual arrangement between employer and employee must be that the employee is entitled to lower cash remuneration and a benefit
With effect from 6 April 2017, the taxation of certain benefits provided under a ‘optional remuneration arrangement’ as defined by ITEPA 2003, s 69A changed for any agreement effective on or after that date. The guidance and legislation relating to the salary sacrifice itself remains unchanged but this guidance must be read in conjunction with the Optional remuneration arrangements guidance note to ensure the correct treatment of benefits provided under salary sacrifice arrangements.
The employee should not be forced into a salary sacrifice agreement. At the end of the agreement period, should the employee wish not to participate further in the salary sacrifice, their pay reverts back to its original level.
The effect of the salary sacrifice is to reduce the employee’s gross pay, which in turn may reduce either the PAYE and / or NIC liability. The advantage to the employer is a saving of up to 13.8% on the salary sacrificed, as employer’s NIC will not be due on the majority of benefits. There is a further advantage to employees who have taken out student loans to pay tuition fees as their student loan deductions are calculated on their gross pay after the operation of the salary sacrifice.