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HMRC internal manual

Employment Income Manual

Salary Sacrifice: how the changes to the employment contract are made

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salary sacrifice arrangements (described in the Finance Act 2017 as “optional remuneration arrangements”) are largely withdrawn.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.

The terms of an employment are set out in the contract between the employer and employee. The contract or agreement will usually specify among other things:

  • the obligations and responsibilities of the employee (for example:- hours of attendance at the workplace; standards of work; dress code, etc.)
  • the remuneration package to be paid and provided (this may include cash wages/salary, non-cash benefits, pension rights, etc.)

In a salary sacrifice arrangement the contract is changed or varied. The employee may agree to a smaller cash salary in return for a non-cash benefit.

The change in the entitlement should be reflected in the contract. If the contract is not effectively varied, the employee remains entitled to the elements of the remuneration package previously specified.

Varying the contract can be achieved in a number of ways:

  • rewriting the document in part or whole
  • setting out agreed changes in a separate document that is attached to the main contract. This may be a letter or a pro-forma
  • employees may be informed of proposals to make changes by the employer

The employer may specify that if an employee has not indicated his/her wish not to participate in the changes by a certain date, the absence of an “opt out” will be regarded as an “opt in”. This approach is often used when wholesale changes to all employees’ terms and conditions are proposed. For example, changes to the employer’s occupational pension scheme.

The first two points on the bulleted list are easily recognised as effective changes as the employee will usually signify his/her agreement by signing the document. The third arrangement is also effective if the employees:

  • have been fully informed of the proposals
  • are given a specified date by which time the “opt out” must be made
  • continue working after the opt out date
  • continue working after the first pay-day when the changes have been implemented without protest

When these conditions have been satisfied, the employees have indicated their agreement to the variation by their conduct and the revised agreement is legally binding on both parties.