DCSIMG

MONEY MATTERS: What is salary or bonus sacrifice?

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A salary or bonus sacrifice involves an employee agreeing to change their terms and conditions of employment relating to pay.

Under their revised employment contract, the employee is entitled to a lower salary or contractual bonus than before, plus a new non-cash benefit from their employer. Normally, this is done to create tax or National Insurance savings without reducing the overall value of an individual’s benefit package. The term salary sacrifice was mainly used to refer to the situation where an employee gave up the right to some of their salary in return for employer contributions to a pension scheme. But with flexible benefit packages becoming increasingly popular, the term is now commonly used to describe any situation where an employee takes a cut in salary in return for a benefit in kind.

Although there are often good reasons for using salary or bonus sacrifice, there can be serious drawbacks. Anyone considering it should weigh up the potential implications before going ahead.

If there’s not a contractual right to the bonus, HMRC doesn’t view this as a sacrifice. So, there’s no need for an exchange of letters between employer and employee. Tax relief on the contribution can be claimed as a business expense and it’ll be assessed by the local Inspector of Taxes.

To be a valid salary or bonus sacrifice arrangement for additional pension rights:

l the employee’s terms and conditions of employment must be changed to reduce their salary or bonus in return for the pension contributions

l the employee’s right to the higher salary or bonus must be given up before it’s treated as received for income tax or National Insurance purposes.

There’s no requirement to inform HMRC of any salary or bonus sacrifice arrangements adopted. But, in practice, many employers ask HMRC to comment to assure arrangements have been implemented properly and that they’re accounting for the correct amount of income tax and National Insurance contributions.

 

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