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HMRC internal manual

Employment Income Manual

Salary Sacrifice: reason for sacrifice

Section 62 ITEPA 2003

From 6 April 2017, the Income Tax and NICs advantages where benefits in kind are provided through salary sacrifice arrangements (described in the Finance Act 2017 as “optional remuneration arrangements”) are largely withdrawn. Guidance on optional remuneration arrangements from 6 April 2017 starts at EIM44000.

Transitional provisions apply for a limited period. For further details see EIM44030.

Certain benefits in kind are excluded from the changes. For further details see EIM44130.

For an explanation of what is a salary sacrifice, see EIM42750. Any change in the remuneration package may effect:

  • the operation of PAYE
  • the amount of tax due
  • the amount of NIC due
  • a tax credit award

A salary sacrifice often replaces cash with a benefit. Examples of the type of benefit received instead of money include:

  • the employer contributing to a registered pension scheme: as the scheme is registered the employer’s contribution is not a chargeable benefit (see EIM42775)
  • childcare vouchers: from April 2005 there is limited exemption from tax and NIC (see EIM16057 and NIM16113)
  • workplace nurseries: these are exempt from tax and NIC (see EIM21905 and NIM16111)
  • other employer provided childcare (see EIM22005 and NIM16111)

Salary sacrifice is commonly used by employers or employees to take advantage of the exemption from tax or NIC or both of certain benefits. It is important to recognise that employers and employees have the right to arrange the terms and conditions of their employment and to enjoy the statutory tax and NIC treatment that applies to each element in the remuneration package. Arrangements, which are designed to make use of these exemptions, should not be regarded as avoidance.