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HMRC internal manual

Employment Income Manual

Salary sacrifice: conditions for successful salary sacrifice: implementation of contractual arrangements: reference or notional salary

Section 62 ITEPA 2003

Reference or notional salary

In many salary sacrifice arrangements the pre-sacrifice level of cash salary may continue to be referred to by both employer and employee. This is a useful summary of the value of the remuneration package as a whole which is made up of cash and benefits following the implementation of the salary sacrifice arrangement. The reference or notional salary may be used in the following situations:

  • to determine an increase in pay
  • to calculate overtime rates,
  • to work out entitlement to holiday pay or sick pay etc
  • to provide information about earnings to a mortgage lender

The use of the reference or notional salary does not invalidate the salary sacrifice. If the employment contract has been effectively varied that is conclusive for the employee’s entitlement to basic salary/wages and benefits. The employer and employee may agree pay for other purposes. Overtime, holidays, sick pay on whatever basis they choose. The Revenue will simply require income tax and NICs on sums received.

It is reasonable for the reference/notional salary to be used in this way. For example the value of the remuneration package is £24,000 per annum of which £20,000 is in cash and the remainder in childcare vouchers. Any increase in pay is to be based on the value of the package, that is £24,000 and that increase is to be paid monthly, in cash.