Salary sacrifice means an arrangement where the employee and employer agree to reduce the employee’s salary and therefore the employee pays less tax.  At the same time the employee is given some benefit, often something that is not taxable on them.

The most common benefits that are not taxable on employees are (all subject to criteria, rules and limits):

• Pensions
• Bicycles used for commuting
• Nursery vouchers
• Mobile phones in the employers name

In tax rules, the salary sacrifice (reduction in taxable salary) is completely separate from the tax free benefit.  If an employee is provided with any of the tax free benefits, these do not create change (and do not reduce) the employees tax and national insurance bill.  The reduction comes from properly reducing the taxable salary.

In order to be taxed on the lower salary HMRC have to be satisfied that the salary really has been reduced.  You will have to provide HMRC when setting up a salary sacrifice scheme full details of the scheme and of the new contractual arrangements.  You will need to satisfy HMRC that the employee’s entitlement to cash pay has been reduced.

The following information is published by HMRC:

1              The employer has to provide HMRC when setting up a scheme:  “Full details of the scheme and of the new contractual arrangements. The employer will need to satisfy HMRC that the employee’s entitlement to cash pay has been reduced”.

2              HMRC also state: “Salary sacrifice is a matter of employment law, not tax law. Where an employee agrees to a salary sacrifice in return for a non-cash benefit, they give up their contractual right to future cash remuneration. Employers and employees who are thinking of entering into such arrangements would be well advised to obtain legal advice on whether their proposed arrangements achieve their desired result.”