Salary sacrifice—basic principles
Produced in partnership with Lewin Higgins-Green of Macfarlanes LLP
Salary sacrifice—basic principles

The following Share Incentives guidance note Produced in partnership with Lewin Higgins-Green of Macfarlanes LLP provides comprehensive and up to date legal information covering:

  • Salary sacrifice—basic principles
  • What is salary sacrifice?
  • Taxation of salary sacrifice arrangements—overview
  • What constitutes a valid salary sacrifice arrangement?
  • In what circumstances are salary sacrifice arrangements used?
  • What are the key drivers for using salary sacrifice?
  • Advantages of salary sacrifice arrangements
  • Risks and considerations when implementing salary sacrifice arrangements
  • Compliance with HMRC guidance
  • Participation in a salary sacrifice arrangement—practical considerations

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.

What is salary sacrifice?

Salary sacrifice (also known as ‘salary exchange’) is an arrangement in which an employee agrees to contractually reduce their entitlement to cash remuneration in exchange for receiving a non-cash benefit. The non-cash benefit may be provided in a tax and National Insurance contributions (NICs) beneficial manner.

Salary sacrifice arrangements can be made in relation to ongoing cash remuneration (eg salary) as well as in relation to once-a-year or one-off situations (eg bonus and termination payments).

This Practice Note uses the term ‘salary sacrifice’ to capture all the above situations.

It is important to note that a salary sacrifice arrangement must never reduce an employee’s cash remuneration below the national minimum wage (NMW) and, therefore, employers must incorporate procedures into any arrangements to ensure this does not happen.

Additionally, following Finance Act 2017, significant reforms to the taxation of salary sacrifice arrangements were introduced which substantially reduce the tax effectiveness of many arrangements. These changes are known as the Optional Remuneration Arrangements