Date posted: 21st Jun 2022

In recent times, many employers have organised salary sacrifice arrangements to allow employees to give up some of their contractual salary in exchange for say additional pension contributions or an electric company car. In these specific cases and if correctly structured, the employee is taxed on the lower of the taxable benefit and the salary foregone.

In the case of the electric car the benefit (i.e., the amount on which tax is charged) is currently 2% of the original list price. There is no taxable benefit on employer pension contributions. So both options are popular with employees.

When the director or employee enters into the salary sacrifice arrangement, they must agree with their employer to vary the employment contract well in advance of the date when the first payment under the new arrangement is due to be made.

If the contractual changes have not been completed by that date, the terms of the previous contract continue to be in force.

This means that the employee is still entitled to receive, and is therefore still taxable on, the previous higher salary, even though the smaller, post- sacrifice amount is paid.

In addition, the employee is reducing their salary for the purposes of borrowing, so you would need to understand other practicalities when entering into such an arrangement.

If you have any queries, regarding salary sacrifice schemes, please contact us.


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