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HMRC internal manual

Employment Income Manual

From
HM Revenue & Customs
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Exemption for amounts which would otherwise be deductible: Relevant salary sacrifice arrangements

S289A ITEPA 2003

For periods prior to 6 April 2016 see eim30050.

The exemption for paid or reimbursed expenses does not apply where the expenses are paid or reimbursed under the terms of a relevant salary sacrifice arrangement.

A relevant salary arrangement means an arrangement, whenever made, whether before or after the employment began, under which the employee gives up the right to receive an amount of general earnings or specific employment income in return for the payment or reimbursement, or where the amount of other general earnings or specific employment income received by the employee depends upon the amount of the payment or reimbursement.

Existing schemes for the payment or reimbursement of expenses under a salary sacrifice arrangement are not excluded, and from 6 April 2016 payments made under a salary sacrifice arrangement will be chargeable to tax and NICs as earnings from the employees’ employment.

Examples

If an employee’s pay each month is calculated by reference to the number of hours they have worked at an hourly rate, but they agree under a salary sacrifice arrangement to reduce their hourly rate in return for a payment of expenses based on the benchmark scale rates and the number of days they spend travelling in the performance of their duties, then this will be a ‘relevant salary sacrifice arrangement’ and the exemption will not apply.  The employer will need to operate PAYE and deduct class 1 NICs from the payments of expenses. The employee would still be entitled to claim a tax deduction from HMRC for any allowable expenses that they’ve actually incurred.

If an employee is paid under an arrangement where each month they receive a payment of salary based on hours worked, expenses payments, and a bonus payment, and the amount of that bonus payment is dependent on the expenses payments that they’ve received, then that arrangement would be a ‘relevant salary sacrifice arrangement’ for the purposes of the exemption. This means that the exemption would not apply to those expenses payments, and the employer would need to operate PAYE and deduct class 1 NICs from those payments. The employee would still be entitled to claim a tax deduction from HMRC for any allowable expenses that they’ve actually incurred.

This restriction only applies where part of an employee’s pay depends on the expenses payments, or where expenses payments are made under a traditional salary sacrifice arrangement.

If another employee is paid under an arrangement which is not a traditional salary sacrifice arrangement, and also receives a salary based on hours worked, expenses payments, and a bonus payment each month, but their bonus payment does not depend on the amount of the expenses payments (e.g. it was instead a fixed percentage of the basic salary) then this would not be a ‘relevant salary sacrifice arrangement’.

After 5 April 2016 any expenses payments paid to employees under a salary sacrifice arrangement will need to be paid after deduction of tax and NICs.  Affected employees will still be able to claim a deduction at the end of the tax year from HMRC for any qualifying expenses that they’ve had to pay.

Where Salary sacrifice schemes were previously accepted under the Non-Statutory Business clearance process, employers will not be able to rely on this clearance for the purposes of the new exemption.