Salary sacrifice is an arrangement between an employee and their employer where the employee agrees to reduce their entitlement to cash pay, usually in return for a non-cash benefit. In the UK, salary sacrifice schemes are commonly used for pensions, childcare vouchers, cycle-to-work schemes, and other non-cash benefits. Here are some key points to keep in mind:

• Tax and National Insurance Contributions: Exemptions on benefits in kind do not apply to salary sacrifice schemes. The only benefits you do not need to value and do not have to report to HMRC for a salary sacrifice arrangement are payments into pension schemes, employer-provided pensions advice, workplace nurseries, and childcare vouchers. Salary sacrifice is a more tax-efficient way for employees to make pension contributions, as it reduces their Income Tax and National Insurance contributions.

• Employer Contributions: Employers can switch to salary sacrifice if they submit their contributions on a net (relief at source) or gross (net pay arrangement) basis. They’ll also not need to inform HM Revenue and Customs about switching their pension scheme to salary sacrifice. Employers can offer salary sacrifice to all employees, as long it doesn’t reduce their salary to below minimum wage.

• Contractual Arrangements: Salary sacrifice affects the employee’s terms and conditions of employment and is a matter of employment law, not tax or pensions law. An employees contract must be altered whenever they change whether they participate in a salary sacrifice scheme or not.

• Benefits: Salary sacrifice can be a fantastic way to effectively increase employee earnings and save on tax. However, it can have an impact on anything that is linked to an employee’s salary, such as life cover and entitlement to certain State benefits.

Overall, salary sacrifice is a way for employees to receive non-cash benefits in exchange for a reduction in their cash pay. It can be a tax-efficient way to make pension contributions and can benefit both employees and employers.