HMRC updates Salary Sacrifice guidance

HMRC has updated their guidance on salary sacrifice schemes. The primary change is the removal of the guidance on ‘Salary sacrifice arrangements set up before 6th April 2017’ which are no longer applicable.

What is a Salary Sacrifice Scheme?

A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit.

Employers can set up a salary sacrifice arrangement by changing the terms of the employee’s employment contract. The employee must of course agree!

Many employers utilise salary sacrifice schemes to provide benefits that help to retain employees. This is likely to become increasingly important given the current staffing issues since the easing of Coronavirus restrictions.

The impact on tax and National Insurance contributions payable by the employee will depend on the pay and non-cash benefits that make up the salary sacrifice arrangement. The employer needs to pay and deduct the right amount of tax and National Insurance contributions for the cash and benefits they provide.

• For the cash component, that means operating the PAYE system correctly via payroll.
• For any non-cash benefits, an employer will need to work out the value of the benefit.

If an employer sets up a new salary sacrifice arrangement, they will need to work out the value of a non-cash benefit by using the higher of the:

• amount of the salary given up.
• earnings charge under the normal benefit in kind rules.

What doesn’t need to be included?

Exemptions on benefits in kind, that you may be aware of from P11D conversations, don’t need to be included in a salary sacrifice scheme. Benefits you don’t need to value and don’t have to report to HMRC for a salary sacrifice arrangement are:

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

For more information, click here to read the HMRC guidance.

Please get in touch if you’re considering setting up salary sacrifice arrangements. We can help to ensure these comply with the guidance and will achieve your goals. We’d also strongly recommend that you refer any potential salary sacrifice scheme to your HR advisor to ensure that you’ve considered all of the implications on your employment terms and conditions.