Salary sacrifice form

Use our form to record an employee’s written agreement to a reduction in their salary in return for the provision of a non-cash benefit in kind. Be aware that HMRC will have an interest where the non-cash benefit qualifies for an exemption from income tax and NI.

What’s a salary sacrifice?

If an employee buys additional annual leave, this is by way of salary sacrifice because they’re giving up the right to receive part of their salary due under their employment contract in return for your agreement to provide this non-cash benefit. The same would apply where they agree to do this, say, in return for permanent health insurance or gym membership. The sacrifice is achieved by varying the employee’s terms and conditions relating to pay - they effectively give up their contractual right to some of their future salary.

HMRC’s role

Whilst salary sacrifice is an employment law matter, HMRC has an interest in determining how income tax and NI apply to the various elements in an employee’s remuneration 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. The true construction of the revised arrangement must be that the employee is now entitled to a lower salary and a non-cash benefit. In addition, the potential future salary must be given up before it’s treated as “received” by the employee for income tax and NI purposes - 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). However, any expected income tax and NI advantages under a salary sacrifice arrangement won’t apply if it enables the employee to swap between salary and a non-cash benefit whenever they like (although there are some exceptions to this).

Only the following non-cash benefits have income tax and NI advantages when they’re provided as part of salary sacrifice arrangements:

• employer pension contributions and employer-provided pensions advice
• childcare vouchers and employer-supported childcare that started on or before 4 October 2018
• workplace nurseries
• cycles and cyclists’ safety equipment provided under the cycle to work scheme
• ultra-low emission cars.

Lifestyle changes

HMRC accepts that certain lifestyle changes 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 unforeseen life events whereby you might agree with the employee to revisit the arrangement to take account of their change in circumstances. 

Salary sacrifice form

Our Salary Sacrifice Form is for the employee to provide their written consent to their salary reduction for a defined period in return for the specified non-cash benefit. It also confirms that this amounts to a variation of their contract of employment for this period. Finally, it specifies that the arrangement can’t be terminated early unless you accept there’s an unforeseen lifestyle change, which we’ve set out as the employee’s marriage, civil partnership, pregnancy or divorce, or their spouse, civil partner or cohabiting partner being made redundant, becoming pregnant or dying.

Other issues

• a salary sacrifice can’t reduce an employee’s pay below the national minimum wage
• it’s still possible to refer to the higher salary as a notional salary for certain purposes without it invalidating the salary sacrifice arrangement, provided you make this clear to the employee - for example, to determine bonuses and pension contributions.