A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit. The tax and NIC advantages of certain benefits provided as part of a salary sacrifice arrangement were removed from 6 April 2017. The change removed the Income Tax and employer NIC advantages of certain benefits provided as part of the arrangements such as mobile phones and workplace parking. There was a transitional plan in place for certain benefits that ended on 6 April 2021.
An employer can set up a salary sacrifice arrangement by changing the terms of an employee’s employment contract. The employee needs to agree to this change. The employee’s contract must be clear on what their cash and non-cash entitlements are at any given time.
A salary sacrifice arrangement cannot reduce an employee’s cash earnings below the National Minimum Wage rates. Employers must put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.
It may also be necessary to change the terms of a salary sacrifice where a lifestyle change significantly alters an employee’s financial circumstances. This may include marriage, divorce and a partner becoming redundant or pregnant. Salary sacrifice arrangements can allow opting in or out in the event of lifestyle changes like these.