Acknowledgement of salary sacrifice

You can use our letter to accept an employee’s written agreement to a reduction in their salary in return for a non-cash benefit in kind.

What is a salary sacrifice

A salary sacrifice arrangement is where an employee agrees to give up part of their contractual salary entitlement in return for your agreement to provide them with a new or enhanced non-cash benefit, such as increased employer pension contributions. The sacrifice is achieved by varying the terms of the employee’s employment contract relating to pay so that they give up their contractual right to some of their future salary.

The role of HMRC

HMRC has an interest in determining how income tax and NI apply to the various elements in an employee’s pay and benefits package. Where a salary sacrifice has been put in place for the purpose of converting salary that’s subject to income tax and Class 1 NI into a non-cash benefit that has a different income tax and NI treatment, HMRC must be satisfied that the employee’s entitlement to salary has been contractually reduced and that a non-cash benefit has been provided instead. In addition, the potential future salary must be given up before it’s treated as “received” by the employee. In practice, this means the contract must be effectively varied in advance of the date when the first payment under the new arrangement is to be made (or the time when the employee becomes entitled to the salary, if earlier). As a general rule, if an employee can swap between salary and a non-cash benefit whenever they like, any expected income tax and NI advantages under a salary sacrifice arrangement won’t apply (although there are some exceptions to this). HMRC does, however, accept that a lifestyle change, which significantly alters an employee’s financial circumstances, may justify changing a salary sacrifice arrangement before the intended duration has elapsed. There’s no legal definition of what a lifestyle change is, but it’s generally intended to refer to such events as marriage, divorce or a partner becoming redundant or pregnant. Salary sacrifice arrangements can allow opting in or out in the event of a lifestyle change (but the employee’s employment contract must be varied with each change). Only the following non-cash benefits now attract income tax and NI advantages when provided as part of salary sacrifice arrangements: (1) employer pension contributions and employer-provided pensions advice; (2) childcare vouchers and directly contracted or employer-provided childcare that started on or before 4 October 2018; (3) workplace nurseries; (4) cycles and cycling safety equipment (including cycle to work schemes); and (5) ultra-low emission cars. Do take tax advice before setting up salary sacrifice so that you pay and deduct the right amount of income tax and NI.

Acknowledgement letter

You can use our Acknowledgement of Salary Sacrifice to acknowledge the employee’s return of their signed Salary Sacrifice Form. It confirms the salary sacrifice arrangement including the salary reduction and non-cash benefit details. Be aware that a salary sacrifice must not reduce an employee’s pay below the applicable national living or national minimum wage rate. In addition, you can still refer to the higher salary as a notional or “shadow” salary for certain purposes without it invalidating the salary sacrifice arrangement, for example, to calculate bonuses, future pay rises, overtime rates and pension contributions.