Salary Sacrifice
- What is salary sacrifice?
Salary sacrifice is an agreement between an employer and employee to change the terms of the employment contract so that the employee’s entitlement to cash pay is reduced, in return for a non – cash benefit. The employer can set this up by changing the terms of the employee’s employment contract. The employee must agree to this change.
(See https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye)
See Section 62 ITEPA 2003
- National Minimum Wage
A salary sacrifice arrangement cannot reduce the employee’s cash earnings below the National Minimum Wage Rates.
Employers must put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.
2.1 What are the National Minimum Wage rates?
In 2023/24 the rates are as follows:
Age Minimum Hourly rate 2023/24
23 and over £10.42
21 to 22 £10.18
18-20 £7.49
Under 18 £5.28
- Altering the Employee Contract
The employee contract must be clear on what cash and non-cash entitlements are at any given time. Employers must alter their contract with each change. The employee can opt in or out of a salary sacrifice arrangement, and their contract must be altered with each change.
- Tax and NIC’s
Tax and NICs depend on the way the salary sacrifice arrangement is made up. This will be pay and non-cash benefits.
For the cash component, operating PAYE and for the non-cash component, a PllD benefit. A P11D form is sent to HMRC by UK employers outlining the cash value of any work-related taxable expenses and taxable benefits you’ve received over the tax year (6 April-5 April). These are only benefits or expenses that have not already been included in your wages.
Some non-cash benefits qualify for an exemption from tax, others are disregarded before calculating NICs. Where there is a benefit provided by the employer to the employee as part of a salary sacrifice arrangement and there is an exemption applying to the employee, any conditions applying to the employee must be satisfied.
- Calculating a non-cash benefit
The value of the benefit needs to be worked out.
Use the higher of the:
* amount of the salary given up
* earnings charge under the normal benefit in kind rules (https://www.gov.uk/expenses-and-benefits-a-to-z) – e.g. different charges for company cars based on emissions.
For the employer subsidised mortgage, it will be the amount of salary given up.
You do not need to value nor report to HMRC where salary sacrifice arrangements are for: payments into pension schemes; employer provided pensions advice; workplace nurseries, childcare benefits; bicycles and cycling safety equipment.
- Salary sacrifice arrangements set up before 6 April 2017 – old rules
Continue to calculate the value of the benefit in the same way until April 2021 (this applies to cars with CO2 emissions of more than 75g/km; accommodation; school fees (even if varied, renewed or modified)
- Salary sacrifice arrangements set up after 6 April 2017 – new rules from 6.4.2018
Subject to the new rules, if varied, renewed, modified (unless the change is connected to SSP; maternal, paternal, adoption or shared parental pay) then use the benefit valuation rules of higher of amount of salary given up and earnings charge.
- Reporting
Benefits must be reported to HMRC at the end of the tax year using end of year expenses and benefits online form, or your payrolling benefits and expenses online service.
- HMRC Clearances Team
Once the salary sacrifice arrangement is in place, Employers can ask the HMRC Clearances Team to confirm the tax and NIC implications. (HMRC will not comment on a proposed salary sacrifice arrangement).
HMRC Clearances Team, Alexander House, 21 Victoria Avenue, Southend on Sea, Essex, SS99 1BD
Or email hmrc.southendteam@hmrc.gsi.gov.uk or nonstatutoryclearanceteam.hmrc.gsi.gov.uk
HMRC will want to see evidence of the variation of terms and conditions in a written contract, and
Payslips before and after the variation.
- Salary Sacrifice – reference or notional salary
See HMRC Employment & Income Manual EIM 42771
HMRC EIM refers to the pre-sacrifice level of cash salary may continue to be referred to by both employer and employee to give a value of the remuneration package as a whole being made up of cash and benefits. The reference or notional salary may be used in the following situations:
* to determine an increase in pay
* to calculate overtime rates
* to work out entitlement to holiday pay, sick pay etc
* to provide information about earnings to a mortgage lender
The use of reference or notional salary does not invalidate the salary sacrifice.
For example, any pay increase is based on the value of the remuneration package, with any increase being paid monthly in cash.
Salary Sacrifice is described in Finance Act 2017 as ‘optional remuneration arrangements’.
The words ‘Salary Sacrifice’ is increasingly being replaced with ‘salary exchange’.
- Tax on Company Benefits
Your employer works out the value of the benefit to you and the tax you pay on it.
11.1 Taxable Benefits (a sample is shown)
(See https://www.gov.uk/tax-company-benefits)
Taxable benefits include medical insurance premiums paid by the employer
Tax on interest free or low interest loans of over £10,000
Living accommodation provided by employer unless provided to do your job
Company cars
11.2 Tax Free Benefits (a sample is shown)
(See https://www.gov.uk/tax-company-benefits-taxfree- company-benefits)
Medical insurance when working abroad
Annual medical check-ups
Interest free loans or low interest loans below £10,000
Living accommodation provided to do your job
Meals in a staff canteen
Hot drinks and water at work
A mobile phone
Workplace parking
Provision of cycles and safety equipment
Christmas parties at less than £150 per head
Tax-free childcare
Workplace nurseries
Employer contributions under a registered pension scheme
- National Insurance on Company Benefits
Employees do not usually pay national insurance on benefits from the employer.
The Employer pays national insurance contributions on the benefit – NIC1A
Employees do pay national insurance on things paid in cash, as treated as earnings.
(https://www.gov.uk/tax-company-benefits/national-insurance-on-company-benefits)
Where the employer pays the employee’s monthly mortgage payment to the mortgage lender as a benefit, there is no employee NIC payable. (had the employer paid the amount of the monthly mortgage payment direct to the employee who then pays his mortgage payment, then employee NICs are payable).
- Expenses and Benefits: Personal Bills
https://www.gov.uk/expenses-and-benefits-personal-bills
13.1 What to report and pay
This depends on who arranges for the supply of goods or services and who pays the supplier.
The Employer subsidised mortgage payment is arranged by the Employer who pays the supplier directly.
* The cost must be reported on form PllD (https://www.gov.uk/employer-reporting-expenses-benefits/reporting-and-paying)
* The Employer pays Class 1A national insurance on the value of the benefit.
[note that where the employee arranges goods and services and the employer pays the supplier directly – PllD and full cost added to earnings and employee NICs Class 1 payable; where the employee arranges and pays the supplier and is reimbursed by employer, then this counts as earnings and PAYE and Class 1 NIC is payable]. Do not use these options.
13.2 Salary Sacrifice arrangements
If the cost of employees’ personal bills is less than the amount of salary given up, report the salary amount instead.
(https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye)
- Salary Sacrifice Disadvantages and the effect of salary sacrifice on payments and benefits
- Life cover – where based on a multiple of employee’s salary, employers may provide less life cover if there is salary sacrifice.
– however, note that HMRC recognises the concept of a notional salary (which could be the salary before salary sacrifice) to compute benefits such as life cover.
- Employees’ entitlement to certain state benefits may be affected if their salary falls below the level at which they pay NICs. (note also that you cannot have a salary sacrifice that takes pay below the minimum wage).
- Obtaining a mortgage – a lower salary may affect the amount of money available to borrow for a mortgage. Mortgage lenders calculate amounts on multiples of salary. Employers can agree to state the original salary when supplying a mortgage reference.
- Could affect entitlement to earnings- related benefits such as Maternity Allowance and Additional State Pension (amount received may be less or lose the entitlement altogether)
- Could affect employee’s entitlement to contribution- based benefits such as Incapacity Benefit and State Pension. May reduce cash earnings on which national insurance contributions are charged.
- Could affect the amount of statutory pay received. If a salary sacrifice arrangement reduces an employee’s average weekly earnings below the lower earnings limit, the employer does not have to make any statutory payments to them.
- Employers must adhere to minimum wage laws. Also, staff may be involved in multiple salary sacrifices that need to be considered.
- Employers will be involved in administration and HR work and require the capacity for that.
- Employers when offering salary sacrifice need to review their HR processes and communicate effectively with staff.
Note: Information as at 1.2.2023
Sources: HMRC Manuals and tax guidance
Consultation on salary sacrifice for the provision of benefits in kind – consultation document 10.8.2016 : changes featured in FA 2017.