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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Salary sacrifice: example of unsuccessful sacrifice

Section 62 ITEPA 2003

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

For an example of a salary sacrifice that is successful see EIM42785.

For information on salary sacrifice generally see EIM42750 onwards

Example of unsuccessful salary sacrifice

The pay slip for the month ended 31 July 2006 gives monthly pay as £2000 plus overtime of £100, deductions for tax of £355 and NIC. The pay slip for the following month shows monthly pay of £2000 plus overtime of £100, deductions for NIC, childcare vouchers of £200 and tax of £310. The code number operated on the salary has not changed.

The situation is not clear from the payslip. When asked, the employer explains that for August, because childcare vouchers of £55 a week are exempt, £220 of vouchers has been deducted from the gross pay of £2100 and tax charged on the net figure of £1880. Further information is needed, for example a copy of the employment contract and any variations agreed by the employer and employee to that contract.

It is established that in July the employee bought childcare vouchers. The employer was not involved. The employer accepts that as the childcare in July was not provided by him, no tax exemption is available. In August the employee asked the employer to buy the childcare vouchers to take advantage of the exemption. The employer did this and deducted the cost from the monthly salary. The contract of employment shows that the employee is entitled to a base salary of £24000 to be paid monthly. This contract has not been varied. As the employee’s entitlement has remained the same, this is not a successful sacrifice. (See EIM42766).

If the employee bought or agreed to buy the childcare vouchers which the employer then reimbursed the cost or paid for, the employer is meeting a pecuniary liability of the employee. In consequence as the employer has not provided the voucher, exemption is not available, (see EIM16057).