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HMRC internal manual

Employment Income Manual

Salary sacrifice: conditions for successful salary sacrifice: summary

Section 62 ITEPA 2003

For an explanation of what is a salary sacrifice, see EIM42750.

For the income tax effects of a salary sacrifice, see EIM42755.

Salary sacrifice arrangements are effective when the contractual right to cash remuneration has been reduced. For this to happen two conditions have to be met:

  • the employment contract must be effectively varied before the changes are implemented. Any right to receive cash wages/salary must be given up before the employee is entitled to receive the remuneration. See EIM42765 for more detail
  • the true construction of the revised contractual arrangement between employer and employee must be that the employee is entitled to lower cash remuneration and a benefit, see EIM42766 for more detail.

If the salary sacrifice is effective, and if the employee receives a non-cash benefit instead, you should also look to see if the employee has the right to give up the benefit at any time and revert to the original (higher) cash salary. If they can, the non-cash benefit may be taxable as “earnings” within Section 62 ITEPA 2003 (see EIM42753 and EIM00570). Some benefits are exempt from income tax altogether in which case no earnings charge can arise. See EIM42755.