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Topic: Pay and pensions

salary sacrifice form
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Salary sacrifice form

Salary sacrifice form

Use our form to record an employee’s written agreement to a reduction in their salary in return for the provision of a non-cash benefit in kind, such as additional annual leave or childcare vouchers. Be aware that HMRC will have an interest where the non-cash benefit qualifies for an exemption from income tax and NI.

What’s a salary sacrifice?

If an employee buys additional annual leave, this is by way of salary sacrifice because they’re giving up the right to receive part of their salary due under their employment contract in return for your agreement to provide this non-cash benefit. The same would apply where they agree to do this, say, in return for childcare vouchers or permanent health insurance or gym membership. The sacrifice is achieved by varying the employee’s terms and conditions relating to pay - they effectively give up their contractual right to some of their future salary.

HMRC’s role

Whilst salary sacrifice is an employment law matter, HMRC has an interest in determining how income tax and NI apply to the various elements in an employee’s remuneration package. Where a salary sacrifice has been put in place for the purpose of converting salary that’s subject to income tax and Class 1 NI into a non-cash benefit that has a different income tax and NI treatment, HMRC must be satisfied that the employee’s entitlement to salary has been contractually reduced for a defined period and that a non-cash benefit has been provided instead. The true construction of the revised arrangement must be that the employee is now entitled to a lower salary and a non-cash benefit. In addition, the potential future salary must be given up before it’s treated as received by the employee for income tax and NI purposes - in practice, this means the contract must be effectively varied in advance of the date when the first payment under the new arrangement is to be made. However, a salary sacrifice arrangement won’t be effective if it enables the employee to continue to be entitled to receive the higher salary rate, or to swap between salary and a non-cash benefit whenever they like.

With effect from 6 April 2017, the government has limited the range of non-cash benefits that attract income tax and employer NI advantages when they’re provided as part of salary sacrifice arrangements. The following non-cash benefits continue to benefit from income tax and NI advantages:

  • employer pension contributions and employer-provided pensions advice
  • employer-supported childcare and the provision of workplace nurseries
  • cycles and cyclists’ safety equipment provided under the cycle to work scheme
  • ultra-low emission cars.

Other non-cash benefits provided as part of salary sacrifice arrangements, such as mobile phone contracts, permanent health insurance and gym membership, no longer benefit from income tax and employer NI advantages. However, any arrangements for accommodation, cars and school fees are protected until April 2021.

 

Lifestyle changes

HMRC accepts that certain lifestyle changes may justify changing a salary sacrifice arrangement before the intended duration has elapsed. There’s no legal definition of what a lifestyle change is, but it’s generally intended to refer to unforeseen life events whereby you might agree with the employee to revisit the arrangement to take account of their change in circumstances. 

Salary sacrifice form

Our Salary Sacrifice Form is for the employee to provide their written consent to their salary reduction for a defined period in return for the specified non-cash benefit. It also confirms that this amounts to a variation of their contract of employment for this period. Finally, it specifies that the arrangement can’t be terminated early unless you accept there’s an unforeseen lifestyle change, which we’ve set out as the employee’s marriage, civil partnership, pregnancy or divorce, or their spouse, civil partner or cohabiting partner being made redundant, becoming pregnant or dying.

Other issues

  • a salary sacrifice can’t reduce an employee’s pay below the national minimum wage
  • during maternity, adoption, paternity and shared parental leave, an employee has the right to benefit from the terms of employment that would have applied had they been at work, except for terms relating to remuneration. However, in Peninsula Business Services Ltd Donaldson 2016, the Employment Appeal Tribunal held that childcare vouchers provided through salary sacrifice do not have to be continued throughout maternity leave as they constitute “remuneration” - the same position would presumably apply to other non-cash benefits acquired through salary sacrifice
  • it’s still possible to refer to the higher salary as a notional salary for certain purposes without it invalidating the salary sacrifice arrangement, provided you make this clear to the employee - for example, to determine bonuses and pension contributions.

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