Knowledge Centre

Salary Sacrifice

Overview

A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit. This means that the employee’s gross salary is reduced by the amount they sacrifice.

The result will lower National Insurance contributions for both the employee and employer.

Employer choice:

Your employer may choose to give you the option of a salary sacrifice arrangement. They will need to change the terms of your employment contract. An employee does not have the right to demand salary sacrifice. Your employer must agree to this change.

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

The impact on Tax and National Insurance Contributions payable for any employee will depend on the pay and non-cash benefits that make up the salary sacrifice arrangement.

Non-cash Benefits

For any non-cash benefits, you need to work out the value of the benefit. The value of the non-cash benefit can be worked out using the higher of the:

  • amount of the salary given up
  • earnings charge under the normal Benefit-in-kind rules

Exemptions on Benefits-in-Kind do not apply to salary sacrifice schemes. The only benefits you do not need to value and do not have to report to HMRC for a salary sacrifice arrangement are:

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

Anything not included on the above list must be reported to HMRC- see the full list here; GOV.UK

Workplace Pension Schemes

In a salary sacrifice arrangement, you agree, with your employer, to ‘give up’ (or ‘sacrifice’) a certain amount of your salary in exchange for payments into your pension.

You and your employer will agree how much you wish to ‘sacrifice’, and your gross pay is reduced by this amount. You will then pay less tax and national insurance on your
reduced earnings, which in turn increases your take-home pay.

For an indepth view of Salary Sacrifice visit GOV.UK