Implementing a salary sacrifice
Produced in partnership with Judith Hogarth of Excello Law
Implementing a salary sacrifice

The following Share Incentives guidance note Produced in partnership with Judith Hogarth of Excello Law provides comprehensive and up to date legal information covering:

  • Implementing a salary sacrifice
  • Practicalities of achieving an effective salary sacrifice
  • Step 1—cost/benefit analysis of implementing a salary sacrifice arrangement
  • Step 2—scheme design
  • Step 3—employee documentation
  • Reduction in gross salary
  • Step 4—communication
  • HMRC clearance
  • Other compliance issues

FORTHCOMING CHANGE: Following consultation, on 11 February 2020, the government announced certain changes to the national minimum wage (NMW) rules, including amendments which will ease the penalty regime in relation to salary sacrifice schemes and introduce more flexibility in pay arrangements for salaried hours workers. For further information, see News Analysis: Share Incentives weekly highlights—13 February 2020—Tax treatment.

From 6 April 2017, the income tax and National Insurance contributions (NICs) advantages where benefits in kind are provided through salary sacrifice arrangements (described in the Finance Act 2017 (FA 2017) as ‘optional remuneration arrangements’) are largely withdrawn. Guidance on optional remuneration arrangements from 6 April 2017 starts at EIM44000. The new optional remuneration provisions make no changes to the underlying salary sacrifice principle, but do change how the benefit is taxed. Subject to some transitional arrangements, all benefits provided under an optional remuneration agreement will be taxed at the higher of the standard benefit in kind value valuation (usually the cost to the employer except for certain benefits) or the salary sacrificed. However, note that the new rules do not apply to pension contributions, childcare vouchers, workplace nurseries, directly employer contracted childcare, cycle to work or cars with CO2 emissions of 75 g/km or less.

Practicalities of achieving an effective salary sacrifice

The main practical steps involved in implementing a salary