Types of salary sacrifice
Produced in partnership with Lewin Higgins-Green of Macfarlanes LLP
Types 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:

  • Types of salary sacrifice
  • What is salary sacrifice?
  • What are optional remuneration arrangements?
  • Implications of the optional remuneration changes
  • Pension contributions
  • Cycle to work scheme
  • Employer-supported childcare
  • Effect of government supported tax-free childcare scheme
  • Conditions for employer-supported exemption
  • Employer-supported childcare vouchers during maternity leave

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.

For more information on salary sacrifice arrangements generally, see Practice Note: Salary sacrifice—basic principles.

While, in principle, salary sacrifice arrangements can be used in respect of any agreed benefit, in practice the choice of non-cash benefits has largely been driven by tax and NICs considerations, ie because the benefit received is either not subject to tax and/or is not taken into account for the purposes of calculating NICs or is subject to a taxable benefit-in-kind value that is less that the amount of salary sacrificed (subject to the Optional Remuneration arrangements (OpRA) rules (see below)). These ‘tax efficient’ arrangements include:

  1. ultra-low emission cars (with CO2 emissions of 75g/km or less and for which