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HMRC internal manual

Employment Income Manual

Salary sacrifice: contributions to a registered pension scheme: income tax effects

Sections 62 and 308 ITEPA 2003

For information on salary sacrifice generally see EIM42750 onwards.

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salary sacrifice arrangements (described in the Finance Act 2017 as “optional remuneration arrangements”) are largely withdrawn.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

Employer contributions into registered pension schemes and employer provided pensions advice are excluded from the April 2017 changes. Payments made under successful salary sacrifice arrangements continue to be regarded as employer contributions and not taxable on the employee.  

For practical considerations on how to deal with a salary sacrifice for payments into a registered pension scheme see EIM42775.

This page tells you about the income tax effects of a salary sacrifice in return for the employer paying a sum to a registered pension scheme for the employee’s benefit.

Where such a salary sacrifice is accepted as successful (see example EIM42785):

  • the potential future cash remuneration sacrificed is not taxable
  • the pension contribution made by the employer in return for the sacrifice will be an employer’s contribution. This employer’s contribution is not taxable on the employee

Where such a salary sacrifice is not successful (see example EIM42786):

  • the employee continues to be taxed under Section 62 ITEPA 2003 on the higher level of cash remuneration received prior to the ineffective salary sacrifice. The employee continues to be entitled to the higher level of cash remuneration and has merely asked the employer to apply part of that remuneration on the employee’s behalf
  • the pension contribution made by the employer as part of the ineffective salary sacrifice is an employee’s contribution. The employee will get full tax relief on the contribution