Definition
An arrangement where an employee gives up part of their gross salary in exchange for a non-cash benefit, such as additional pension contributions, childcare vouchers (for existing members), cycle-to-work scheme access, or an electric vehicle lease. The benefit is that both employee and employer save on National Insurance contributions.
UK Context
The Finance Act 2017 restricted the tax advantages of salary sacrifice to pensions, childcare, cycle-to-work, and ultra-low emission vehicles. The salary after sacrifice must not fall below the National Minimum Wage. HMRC guidance sets out the requirements for a valid salary sacrifice arrangement.
Best Practices
- Ensure salary sacrifice does not reduce pay below the National Minimum Wage for any employee
- Update employment contracts to reflect the reduced salary and document the arrangement clearly
- Communicate the benefits and any implications clearly, including effects on mortgage applications and statutory pay calculations
Frequently Asked Questions
What benefits can be offered through salary sacrifice?
Since April 2017, the main benefits that retain full tax and NIC advantages through salary sacrifice are pension contributions, childcare vouchers (for existing members), cycle-to-work schemes, and ultra-low emission vehicles. Other benefits sacrificed are taxed at the higher of the salary given up or the benefit value.
Does salary sacrifice affect statutory pay?
Yes, because statutory payments like SMP, SSP, and statutory redundancy pay are based on actual earnings. A salary sacrifice arrangement reduces the employee's earnings, which may reduce their statutory pay entitlements. Employers should make employees aware of this before they enter the arrangement.