HMRC updates salary sacrifice guidance

A salary sacrifice is an arrangement between an employer and an employee that sees the latter’s entitlement to cash pay reduced in exchange for a non-cash benefit. For example, an employee might agree to sacrifice a percentage of their salary in exchange for more generous pension contributions, a better private healthcare scheme, or additional life insurance. In all cases, a salary sacrifice requires a redrafting of the terms of the employee’s employment contract, which must then be agreed to by both employer and employee.

HMRC has now updated the guidance on “salary sacrifice arrangements set up before 6 April 2017” as the transitional arrangements for calculating the value of the benefit ended on 5 April 2021. When employers want to set up new salary sacrifice arrangements, they will now need to work out the value of a non-cash benefit by using the higher of two possible figures: either the amount of salary that the employee is sacrificing, or the earnings charge under normal benefit in kind rules. For company cars with CO2 emissions of 75g/km or less, employers should always use the latter to determine value.

Employers need to be aware of this change in guidance, as salary sacrifice arrangements must be factored in to the National Insurance contributions and tax they pay for employees. Cash payments can be dealt with using the PAYE system via payroll, but non-cash benefits must be worked out as above. You can review HMRC’s updated guidance at https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye?utm_medium=email&utm_campaign=govuk-notifications&utm_source=ba25ff0d-dfee-4e3c-9ad2-3a6bd9302a14&utm_content=daily#overview.

If you are setting up salary sacrifice arrangements and want to make sure they’re effective and take the latest guidance into account, please contact JW Hinks on 0121 456 0190.