With the upheaval of Covid-19, employers may find themselves asked to change the terms of a salary
sacrifice arrangement. What do you need to know?
Salary sacrifice: the basics
Salary sacrifice arrangements are agreements that reduce the amount your employee gets as cash
remuneration in return for some sort of non-cash benefit.
The number of benefits that can be provided free of income tax and National Insurance Contributions
(NICs) under salary sacrifice schemes has been steadily eroded in recent years. The prime
advantage is broadly now restricted to: employer pension contributions to approved schemes, pensions
advice, cycle to work schemes, qualifying low emission cars and certain specific childcare provision.
Please contact us for further details on these as they are not without complexity.
With these particular benefits, reducing gross pay through salary sacrifice can reduce employee NICs
and income tax liability. For you as employer, there should also be a saving in employer NICs. You can
of course offer benefits other than these, but the advantage is likely to accrue from group purchase
discounts for things like gym facilities, rather than tax or NICs savings.
Tip: Make sure you remain minimum wage compliant when setting up any
salary sacrifice arrangement: check that the arrangement doesn’t take cash earnings below the relevant
minimum wage rate.
Salary sacrifice arrangements are based on the idea that the employee has permanently given up the
right to part of their salary, with the terms of the sacrifice, and details of the non-cash benefit
received in exchange, formally set out in the employment contract. In practice, arrangements tend
to apply for a minimum period, usually a year.
The need for permanence obviously creates an issue if you are asked to alter the arrangement. As a
general rule, if an employee swaps between cash earnings and a non-cash benefit at will, any
expected tax and NICs advantages are at risk. HMRC does acknowledge, however, that in some
circumstances, a salary sacrifice arrangement can be varied or discontinued without adverse
This exception is for ‘lifestyle’ events:
- a partner becoming redundant or pregnant.
And because of the pandemic, HMRC has expanded the list to include:
- changes to circumstances directly arising as a result of Covid-19.
When varying a salary sacrifice arrangement, the employment contract is key. To change the terms of the
salary sacrifice agreement, the employment contract must change, and change first, setting
out clearly entitlement to cash salary and non-cash benefit at any given time.
Working with you
With HMRC’s emphasis on the employment contract being varied before changes are implemented, and the
right to salary being given up before an employee is entitled to receive the remuneration, this is an
area to get right first time. We are always happy to advise on salary sacrifice or any other aspect of
tax efficient remuneration.