Salary Sacrifice Overview

A salary sacrifice arrangement involves an employee giving up part of their salary in exchange for a non-cash benefit. The employees gross salary is then reduced by the amount they agree to sacrifice. This arrangement creates savings for both the employee and employer – the employee benefits from reduced income tax and national insurance liability, and the employer is subject to lower Class 1 NICs.

Salary sacrifice arrangements are voluntary and require agreement from the employee and employer before they can take place. An employee cannot insist upon a sacrifice arrangement and likewise they are not obligated to accept one if their employer suggests it. Salary sacrifice arrangements legally constitute a variation of the contract of employment, and so they must be set up carefully, with both parties agreement.

A salary sacrifice arrangement must not reduce an employee’s earnings below the National Minimum Wage – employers must ensure that procedures are in place to cap salary sacrifice deductions and maintain NMW rates.

OpRA

Since 2017, the Optional Remuneration Arrangement (OpRA) rules need to be considered when implementing a salary sacrifice arrangement. OpRA was introduced by the government to reduce the number of benefits that could be provided by salary sacrifice. Under OpRA, there are certain exempt items that you can still deliver under salary sacrifice rules and reduce taxable and NIable pay.

These are:

• Payments into a pension scheme
• Childcare vouchers
• Bicycles
• Cars with CO2 emissions of less than 75gkm

These exemptions do not need to be valued and do not need to be reported to HMRC.

There are two ways to approach the non-exempt items i.e., the items that fall under OpRA regulations.

1. Operate them as standard net deduction, meaning the employee no longer benefits from reduced taxable and NIable pay.
2. Operate the non-exempt items under a salary sacrifice arrangement, but then tax the benefit via whichever method of taxing benefits in kind the organisation uses (P11D’s or Payrolling). If this approach is taken, then either a Type A or Type B arrangement applies.

Type A is where the employee gives up a right to receive earnings in return for a non-cash benefit (traditional SS). The non-cash benefit they receive is subsequently taxed via the P11D/Payrolling process. The amount taxed through this process is the higher of:

• The salary sacrificed.
• The amount of the benefit received.

Type B is where the employee chooses to receive a benefit rather than a salary. The most common type of arrangement is choosing between a company car or a car allowance. Where Type B arrangements apply, the employee will be taxed on the higher of:

• The cash amount the employee would have received
• The taxable benefit amount determined under the benefit rules.

The higher amount is also subject to Class 1A NIC’s.

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. In some cases, this can increase the amount of your take-home pay.

For an in-depth view of Salary Sacrifice visit GOV.UK