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HMRC internal manual

Employment Income Manual

Salary sacrifice: contributions to a registered pension scheme: example of successful salary sacrifice

Sections 62 and 308 ITEPA 2003

This is an example of a successful salary sacrifice and its income tax effects.

For an example of a salary sacrifice that is not successful see EIM42786 and EIM42790.

For information on salary sacrifice generally see EIM42750 onwards.

Example of successful salary sacrifice

A senior employee, who is not a director, is contractually entitled to a bonus each year. The amount of the bonus is based on the profits of the employing company.

The company’s year end is 31 January. Accounts for the year ended 31 January 2003 are finalised on 31 July 2003 enabling the amount of the bonus to be calculated. The employee is not entitled to payment of the bonus until 31 October 2003. The employee is informed on 31 August 2003 that the bonus will be £10,000. The letter informing the employee of the bonus asks the employee to choose between:

  • receiving the bonus, or
  • giving up his contractual rights to the bonus in return for the company making a £10,000 employer’s contribution to a registered pension scheme for his benefit.

The employee chooses the second option and returns the completed documentation to the company to this effect on 30 September 2003. The completed documentation makes it clear that

  • the employee has given up his contractual rights to the bonus based on the company’s profits for the year ended 31 January 2003 and
  • he does not have the right to change his mind on this decision.

This is a successful sacrifice because it meets the necessary requirements (see EIM42760):

  • the bonus would have become money earnings on 31 October 2003. It is given up before then.
  • the true construction of the revised arrangement between employer and employee is that the employee has got lower taxable cash remuneration and a non-taxable benefit. The £10,000 is not chargeable.