Tax implications of salary sacrifice
Produced in partnership with Lewin Higgins-Green of Macfarlanes LLP
Tax implications of salary sacrifice

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:

  • Tax implications of salary sacrifice
  • Usual tax implications, including optional remuneration arrangements
  • Salary sacrifice and pension contributions
  • Employer-supported childcare—salary sacrifice arrangements
  • Cycle to work scheme
  • Disguised remuneration rules
  • VAT and salary sacrifice
  • Corporation tax and salary sacrifice
  • Disclosure of Tax Avoidance Schemes (DOTAS)

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.

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).

HMRC recognises that, in principle, salary sacrifice arrangements, properly implemented, are not treated as tax avoidance.

However, the government was concerned by the rapid growth of salary sacrifice arrangements and restricted the operation of salary sacrifice arrangements through the introduction of the optional remuneration arrangements (OpRA) rules which, in essence, mean that (except in relation to certain specified benefits) an employee will receive no tax advantage and an employer will receive no employer’s NICs advantage in relation to such arrangements (although an employee will continue to receive an employee’s NICs advantage).