Changing the terms of a salary sacrifice agreement

By Tolley in association with Robert Woodward

The following Employment Tax guidance note by Tolley in association with Robert Woodward provides comprehensive and up to date tax information covering:

  • Changing the terms of a salary sacrifice agreement
  • Background
  • Modern application
  • HMRC view on permanent
  • PAYE / NIC
  • Lifestyle changing events
  • Employment law

While the optional remuneration rules effective from 6 April 2017 affect the taxable amount of many benefits provided under salary sacrifice, attention is still required for the salary sacrifice agreement itself and the existing rules regarding changing the agreement itself still apply.

The concept of salary sacrifice is based on a tax case which was lost by the taxpayer. However, applying the reasoning from the case and based on the interpretation by HMRC (in particular see the GOV.UK website  and EIM42700), salary sacrifice can be used as a workable employee benefits delivery tool.


In 1961, Mr Bell entered into a scheme with his employer under which, for a reduced salary, he could have the use of an Austin, which he could return if 14 days’ notice was given and see his salary revert to its original level. The tax treatment of the ‘payment’ made by Mr Bell was challenged by the Inland Revenue and led to the 1971 House of Lords’ ruling in Heaton v Bell. It was ruled that Mr Bell was still entitled to the same gross pay whether or not he had the car (the ruling pre-dates the car benefit rules, therefore no tax was due on the provision of the car). Because they lost the case, Mr Bell and his employer probably did not realise that they would help create an increasingly popular tax planning technique.

Heaton v Bell 46 TC 211 (subscription sensitive)
Modern application

In making their ruling, the Law Lords set out in broad terms the prerequisites for what is now termed a ‘successful’ salary sacrifice arrangement by HMRC. Ideally, a salary reduction (not a deduction) must be:

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