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HMRC internal manual

Employment Income Manual

alary sacrifice: conditions for successful salary sacrifice: implementation of contractual arrangement: payslip information

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salary sacrifice arrangements (described in the Finance Act 2017 as “optional remuneration arrangements”) are largely withdrawn.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 a summary of the conditions that have to be met for a successful salary sacrifice see EIM42760.

If the scheme has been implemented then changes will be made to the employee’s gross pay and the provision of benefits.

Payslip information

If reduced salary/wages are payable then these changes should be reflected on the payslip. However, if you ask to see a post sacrifice payslip you may see that the figure of gross remuneration on the payslip is unaltered. This does not automatically mean that the salary sacrifice is ineffective. If the employment contract has been effectively varied the employee’s entitlement to remuneration has changed. The contractual agreement is evidence of change and figures on a payslip do not invalidate that. However if there is no signed agreement (see EIM42753) then it is reasonable to consider all available information. The payslip is one of the pieces of evidence that will help establish whether changes have been properly made. HMRC has become aware that some payslips continue to show the pre-sacrifice level of gross salary as gross pay. The sacrificed amount is shown as a deduction made before PAYE and NICs is applied. This format gives the impression that the employee is entitled to the former (higher) level of salary and has simply applied a sum to reimburse the employer for the provision of a benefit.

We have spoken to representatives of payroll managers. They made the case that most payroll software can only hold one number in the field for gross pay. In a salary sacrifice situation more than one value is often required – a lower figure to calculate basic wages/salary and a higher figure to calculate overtime, holiday pay, etc (See EIM42771). We agreed that where the employment contract has been effectively varied the format of the payslip will not be used to challenge the effectiveness of the arrangement. However, as noted above, if the contract has not been changed, the format of the payslip is one piece of evidence that we would use as a basis on which to form a view

For mortgage applications, the amount of pay whether it is includes benefits or is restricted to cash is a matter for the lender. It is not relevant for tax and NIC purposes.