An overview of salary sacrifice arrangements

A salary sacrifice arrangement involves an agreement by an employee to lower their cash salary in exchange for non-cash benefits. Importantly, this reduction must not bring their earnings below the National Minimum Wage (NMW).

If an employee wishes to join or leave a salary sacrifice arrangement, the employer is required to update their contract, thus ensuring clarity on cash and non-cash entitlements.

Additionally, significant lifestyle changes—such as marriage, divorce, a partner's redundancy or pregnancy—may necessitate adjustments to the arrangement, allowing employees to opt in or out.

The following benefits are currently exempt from Income Tax or National Insurance contributions and do not need to be reported to HMRC:

  • payments into pension schemes;
  • employer provided pensions advice;
  • workplace nurseries;
  • childcare vouchers and directly contracted employer provided childcare that started on or before 4 October 2018; and
  • bicycles and cycling safety equipment (including cycle to work schemes).

In some circumstances when a salary sacrifice is tax-free, for example, swapping salary for an employer contribution to a pension scheme, the reduction in salary will reduce an employers’ NIC charge.

Source: HM Revenue & Customs Tue, 12 Nov 2024 00:00:00 +0100