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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Employment income provided through third parties: exclusions: employee benefit packages: general

Section 554G ITEPA 2003

An employee benefit package may come through the Section 554A gateway. However, there will be no Part 7A income if all the conditions of Section 554G ITEPA 2003 are met.

Whether or not the transaction is a loan, the relevant step must meet three conditions and the package of benefits must meet two conditions. These five conditions are set out in this page.

Some other conditions must also be met. The conditions to be met depend on whether the transaction is or is not a loan.

  • If the transaction is a loan, the conditions in EIM45220 must be met.
  • If the transaction is not a loan, the conditions in EIM45225 must be met.

For the purposes of Section 554G, ‘A’ includes persons linked with A unless specifically noted. See EIM45860.

The relevant step

Three conditions apply to the relevant step.

  • The step is not taken under a pension scheme (within the meaning of Part 4 FA 2004). You will find this definition of ‘pension scheme’ in RPSM20000000 (Registered Pension Scheme Manual: glossary).
  • The step is taken for the sole purpose of a transaction which:

    • the person (P) taking the step has with A, and
    • P entered into in the ordinary course of P’s business.
  • There is no connection (direct or indirect) between the relevant step and a tax avoidance arrangement (see EIM45855).

Salary sacrifice

On its own, sacrificing salary in favour of provision of tax-exempt or tax-advantaged benefits does not constitute a tax avoidance purpose. Whether there is a tax avoidance purpose is a question of fact and there may be particular salary sacrifice arrangements that do have a tax avoidance purpose.

The package of benefits

Two conditions apply to the package of benefits which includes P’s transaction with A.

  • The terms on which P enters into the transaction with A are substantially the same as the terms on which P normally enters into similar transactions with employees of B under the package of benefits. A transaction is ‘similar’ if it is of the same type as, or a similar type to, P’s transaction with A.
  • Section 554G does not apply if:

    • B is a company, and
    • of those of B’s employees to whom the package of benefits is available, a majority have a ‘material interest’ in B (see EIM20212).