Tax implications of salary sacrifice

Produced in partnership with Lewin Higgins-Green of FTI Consulting

Practice notes

Tax implications of salary sacrifice

Produced in partnership with Lewin Higgins-Green of FTI Consulting

Practice notes

salary sacrifice (also known as ‘salary exchange’) is an arrangement in which an employee agrees to contractually reduce their entitlement to cash remuneration in exchange for receiving a non-cash benefit. The non-cash benefit may be provided in a tax and National Insurance Contributions (NICs) beneficial manner.

Salary sacrifice arrangements can be made in relation to ongoing cash remuneration (eg salary) as well as in relation to once-a-year or one-off situations (eg bonus and termination payments).

HMRC recognises that, in principle, salary sacrifice arrangements, properly implemented, are not treated as tax avoidance.

However, the government was concerned by the rapid growth of salary sacrifice arrangements and restricted the operation of salary sacrifice arrangements through the introduction of the optional remuneration arrangements (OpRA) rules which, in essence, mean that (except in relation to certain specified benefits) an employee will receive no tax advantage and an employer will receive no employer’s NICs advantage in relation to such arrangements (although an employee will continue to receive an employee’s NICs advantage).

Usual tax implications, including optional remuneration arrangements

Effective

Lewin Higgins-Green

FTI Consulting

Lewin Higgins-Green leads FTI Consulting’s Employment Tax & Reward offering in the UK. Lewin works with clients across a wide range of sectors, with a strong focus on financial services, and advises clients on employee related tax matters, both for domestic and internationally mobile employees. Lewin is a chartered tax advisor and a member of the Employment Taxes Technical Sub-Committee of the Chartered Institute of Taxation.

Jurisdiction(s):

United Kingdom

Key definition:

Salary sacrifice definition

What does Salary sacrifice mean?

Salary sacrifice is an agreement between the employer and employee by which the employee foregoes future remuneration in exchange for the employer paying the equivalent amount as a contribution to a pension scheme.

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