1. Why would you want to sacrifice some
of your salary?
Especially in the current economic climate with our
belts already tightened, the mere mention of a reduction
in salary would give cause for grave concern, adding
further financial hardship to an already over-stretched
household budget. But should this be a concern when
the sacrifice refers to a salary sacrifice scheme offered
by their employers.
A salary sacrifice occurs if an employee contractually
agrees with their employer to give up part of their salary
(cash remuneration) in return for the employer agreeing
to provide the employee with a non-cash benefit. The
benefit to the employee is the possibility of a reduced
liability to both tax and NICs (employers can also benefit
due to a reduced NICs liability).
Historically the phrase salary sacrifice mainly referred to
an employee agreeing to a ‘salary’ reduction in return
for the employer increasing their pension contributions
to the employee’s pension fund. The employee would
then cease their own pension contribution which would
offset the original reduction in salary. The incentive for
the employee is the reduced salary which can lead to
tax and NICs savings and therefore an increased ‘net’
take home pay.
Nowadays the term salary sacrifice simply refers to any
arrangement where an employee contractually agrees
with their employer to receive a reduced wage in return
for a benefit in kind.
Sound simple? It can be but there are conditions to
the sacrifice arrangement that the employer needs
to consider, failure to do so may lead to compliance
issues with HMRC. The term salary sacrifice forms
part of employment law and not tax law, HMRC do
not approve salary sacrifice schemes, instead they
issue many guidance notes on how a scheme should
be structured. The onus is on the employer to satisfy
themselves and HMRC if audited that their scheme is
compliant with the HRMC guidance notes issued.
Salary Sacrifice: An Overview

2. 1 Employment Contract
It may be necessary for the employer to change
or vary the employee’s contract defining the
sacrifice agreement. This will evidence the fact
that the employee agreed to a reduced
remuneration before it is physically received
and was replaced with a non-cash benefit. The
employee’s contract can be amended to reflect
the change or defined in a separate document
that is then attached to the contract.
Another acceptable method is to inform all
employees of the proposed changes and rather
than requesting employees to ‘opt in’ instead the
employer states that the workforce will be set
to ‘opt in’ unless they physically ‘opt out’. The
employer in this case must issue a date to all
employees by which time the ‘opt out’ must be
made. For this method to be legally binding the
employee needs to continue working after the ‘opt
out’ date and have continued to work after the first
pay-day following the changes, without protest.
2 National Minimum Wage
Employers must observe the national minimum
wage (NMW) currently in force. If the employee’s
salary was equal to or greater than the NMW prior
to entering the sacrifice agreement but fell below
the NMW as a result of operating the sacrifice,
the employer cannot enter the employee into the
sacrifice agreement.
3 Statutory Payments
There can be situations when employees could
lose out on statutory benefits. SSP, SMP, OSPP,
ASPP or SAP are only payable if the employees
average weekly earnings are equal to or above the
Lower Earning Level (currently £107 per week).
Employee’s entering in to a sacrifice arrangement
with their employer needs to be mindful of this
as the sacrifice could reduce the salary to a
point where it affects the value or even prohibits
entitlement to statutory payments.
4 Agreement Period
In practice the benefit in kind made available via
the sacrifice scheme should be in place for a period
of no less than 12 months. Reverting back to a
non-sacrifice agreement is acceptable in the eyes
of the HMRC prior to 12 months elapsing without
incurring tax and NICs liability only if the employee’s
financial circumstances change unexpectedly.
HMRC have defined this as a ‘lifestyle change’.
Examples of a lifestyle change are marriage, birth
of a child, divorce and redundancy.
5 Special Benefits
Certain benefits can be varied each pay period
without breeching the sacrifice agreement and
will not be subject to compliance investigation or
deemed to be an unsuccessful sacrifice; these
are car parking within the workplace, bicycle and
associated safety equipment, childcare vouchers,
workplace nurseries or childcare provision
contracted by the employer.
6 Pay Advice Statement
The employer is obligated to show the sacrifice
clearly on the employees pay statement. The pay
statement can be used in compliance cases as
evidence that the sacrifice arrangement is being
operated correctly. In the early days of salary
sacrifice HMRC required that only the reduced
salary should be shown per pay period. This
requirement has been removed as HMRC realise
that some payroll software suppliers were unable
to hold the new salary after sacrifice and the pre
sacrificed salary amount sometimes known as the
notional salary for working out overtime rates etc.
It is now acceptable to show either the reduced
salary after sacrifice or the pre sacrifice salary and
a negative sacrifice amount. It is important that
if you choose to hold both the full salary and the
sacrificed value, the sacrificed value is shown as
a negative and appears within the payments section
on the payslip and not the deductions section of
the payslip.
Guidance Notes when Setting up a Salary Sacrifice Scheme

3. Salary Sacrifice and Pensions
Auto-enrolment
The recent introduction of Auto-enrolment has meant
the cost of employing people has risen for many
employers. In addition to employee contributions,
the work involved with administering, monitoring and
implementing auto-enrolment will also increase costs.
Salary Sacrifice is therefore proving an attractive option
as a way of mitigating part of this additional cost.
The use of salary sacrifice with auto-enrolment benefits
both the employer and employee. By converting the
employee pension contribution into salary sacrifice the
employer contribution is enhanced and the employee
saves both tax and NICs.
Conclusion
For many employees, if a salary sacrifice arrangement is
made available by their employer, it could be financially
worthwhile opting in. There are tax and NIC savings
to be made by both the employee and the employer.
Given the introduction of auto-enrolment, there seems
to be a trend where more and more employers’ look to
offer a salary sacrifice scheme as a means of offsetting
costs associated with the setting up and administration
of auto-enrolment.
Employers do need to be aware of the guidance notes
issued by HMRC and structure their scheme to ensure
compliance as well as making sure the payroll software
in use can produce the employee pay statements that
conform to the HMRC requirements.
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