Salary Sacrifice – Is yours effective? 4 Top Tips to help you make sure

A recent case involving Reed Employment and the HMRC has led to an estimated tax bill of £158 million. It all revolves around a Salary Sacrifice arrangement covering temporary workers’ travel expenses.

However, one of the main things that has come out of the ruling is that HMRC have had to be a bit clearer on what constitutes a valid arrangement. As Salary Sacrifice is used by a huge number of employers to cover anything from Childcare Vouchers to Pension Contributions and Bike to Work. We’ve therefore set out five tips to help you make sure that your Salary Sacrifice arrangement is effective.

1. Don’t let your employees opt-in or opt-out at their will

HMRC have always stated that if a “lifestyle change” occurs the employee could withdraw from the arrangement. Allowing your employees to opt in and out willy-nilly will probably mean that your arrangement is not effective.

Rather helpfully HMRC have never defined what they mean by “lifestyle change”. Generally it’s taken to mean unforeseen life events (e.g. redundancy of a partner, pregnancy of employee or partner, marriage or divorce of employee) where an employer might agree to revisit an existing contractual arrangement to take account of a change in circumstances.

2. If your employees give up salary it must be for an identified benefit

If your employee has reduced their salary it’s got to be in return for some clear benefit. A good example if pension contributions where, in return for taking less salary, the employee gets a pension contribution from the employer.

3. Your employees must be able to make an informed decision

Communication is the key here. The employee has got to be able to understand the consequences of entering into a Salary Sacrifice arrangement. It’s difficult for an employer to work out whether it’s in every employee’s interest as that’ll be down to their own financial and tax position. What the employer can do is provide a balanced view on the advantages and disadvantages of the arrangement.

4. Your scheme must be incorporated into your employee’s employment contract

Entering into a Salary Sacrifice arrangement means that the employee has accepted a change to their terms and conditions of employment. Therefore their contractual agreement with you as their employer has changed.

Although it’s not a requirement of the legislation an employer can submit the Salary Sacrifice agreement to HMRC for approval. When they get asked HMRC basically check three things.

  • That an effective variation of the contractual terms and conditions has taken place
  • The employee’s cash earnings have been reduced and a benefit-in-kind provided
  • The benefit-in-kind has been treated correctly for tax and National Insurance – e.g. p11d


Salary Sacrifice is a great way for employers to provide benefits in a tax efficient way for employees. However, if the arrangement isn’t set up properly you and your employees could end up with a large tax bill. The watchword, as always, is to tread carefully and get some professional advice.

Steve Clark

44 Financial Ltd regularly advises on Salary Sacrifice arrangements for our clients and works with other professionals to ensure that these are effective. To find out more about what we can do for you contact us by clicking here.

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