A salary sacrifice arrangement is a contractual agreement between an employee and an employer, where the employee exchanges a proportion of their pensionable pay for non-cash benefits.

You must submit a request to your employer if you wish to take advantage of the salary sacrifice arrangement.

You can ask them to provide you with a breakdown of what your cash and non-cash entitlements are if you enter into an arrangement.

You are advised to consider not only the benefits of these schemes, but the impact this may have on your pension.

A salary sacrifice arrangement in Scotland will not reduce your pensionable pay where the sacrifice relates to the provision of childcare vouchers or the cycle to work scheme.  Since December 2023 all other salary sacrifice arrangements in Scotland will reduce your pensionable pay.  Arrangements already in place before this change was implemented in December 2023 can continue as they are (in terms of whether they treat pay as pensionable or not) until they expire. The guidance below, as it relates to pension implications, is for members in the NHS in England, Wales, Northern Ireland and Scotland (excepting in relation to the two arrangements detailed above).

What benefits you can access

Examples of available salary sacrifice arrangements include:

• childcare vouchers
• cycle to work scheme
• car hire/lease scheme
• on-site nurseries
• home computers
• car parking
• gym membership
• pre-paid store cards
• personal learning.

For each salary sacrifice arrangement, both employee and employer must agree on what the cash value of the benefits on offer is worth to both groups. This ensures that the benefits from these arrangements fairly compensate the employee for their loss of income.

Sacrifice arrangements tend to remain in place for at least 12 months, unless the employee experiences a lifestyle change. These arrangements are then reviewed, and, dependent on mutual arrangement, they are either renewed or removed from the employee’s contract.

Adjusting your arrangement

You have the right to adjust your salary sacrifice arrangements in the event of a lifestyle change.

Your employer would ultimately decide what constitutes a lifestyle change, and we would expect this to follow the employees wishes. A lifestyle change can include:

• marriage
• divorce
• your partner becoming redundant or pregnant
• COVID-19.

Earnings cannot fall below the national minimum wage, otherwise employers will be subject to fines for breaching regulations. If you have any concerns, we would recommend that you raise this with your employer.

Implications

Tax and national insurance benefits

Prior to 6 April 2017, all salary sacrifice arrangements were made prior to assessing a doctor’s income against income tax and NI. This had the effect of lowering the amount of tax and NI contributions due on the doctor’s salary, thereby incentivising employees to engage in such arrangements.

From 6 April 2017, the Government removed any tax and employer national insurance advantages for salary sacrifice schemes, except in five areas where such arrangements can be made. These are:

• increasing employer pension contributions to registered pension plans (e.g. buying additional pension)
• an employee securing advice on their pension
• employer supported childcare consisting of either:
  - childcare vouchers provided by the employer for qualifying childcare, (only applicable to those employees who joined the relevant scheme prior to 4 October 2018)
  - directly contracted or employer contracted childcare, where the employer directly arranges for the provision of qualifying childcare
• cycle to work schemes
• ultra-low emission cars (emissions under 75 grams of CO2 per kilometre).

Tax and national insurance advantages for employees who were enrolled in a non-qualifying car, accommodation, or school fee salary sacrifice arrangement were  removed from either 5 April 2021, or by the end date of their agreement with their employer, whichever is sooner.

There is no tax nor national insurance contribution advantage in providing any benefits through a salary sacrifice arrangement aside from the five arrangements outlined above. This includes charitable donations, car parking and gym membership.

If a salary sacrifice arrangement is used to provide other benefits outside of the five noted, income tax and national insurance contributions arise on the higher of the:

• amount of salary sacrificed, or
• the cash equivalent of the benefit.

Read more from HMRC.

Salary sacrifice differences between pension schemes

The guidance below relates to England, Wales, Scotland and Northern Ireland. However, solely in respect of childcare vouchers and cycle to work schemes, salary sacrifice arrangements in Scotland do not reduce the amount of pay treated as pensionable.  All other salary sacrifice arrangements in Scotland will reduce pensionable pay as in other nations.

High earners and the Annual Allowance

Higher earners need to undertake calculations to assess whether they are subject to the standard or tapered Annual Allowance.  Salary sacrifice arrangements may be beneficial in reducing taxable pay and avoiding or reducing the impact of the taper.

Final pay controls for employers

There are rules in place that discourage employers from awarding employees significant rises in their pensionable pay close to retirement. These are known as final pay controls and are designed to prevent people receiving additional pension that they have not paid much in employee contributions for.

Ending a salary sacrifice close to retirement causes a rise in pensionable pay and this may have resulted in an employer being charged under a final pay control.

From 1 July 2021, and with retrospective effect to 1 April 2018, if your employer was subject to a final pay control charge as a result of a salary sacrifice arrangement ending this may be reimbursed.

Applications for reimbursements had to be made by 31 December 2021.

This example of leasing a car via salary sacrifice demonstrates how a salary sacrifice scheme can work.

Salary Sacrifice and partial retirement

Whilst most arrangements will cause a reduction to pensionable pay (excluding the permitted 2 schemes in Scotland) this will not count towards the reduction required to be made to pensionable pay in order to qualify for partial retirement.

Impact on other benefits

A reduction in salary from sacrifice arrangements means that work-related statutory payments (payments paid by the employer and based on average earnings over a fixed period, such as statutory maternity pay and statutory sick pay) will also be affected. The reduced salary figure will be used in any calculations of these payments.

Furthermore, a lower salary as a result of a salary sacrifice arrangement could reduce the value of benefits available in the NHS pension scheme, such as death in service and ill-health retirement benefits. Furthermore, mortgage applications will be made based on a member’s lower salary.

What to consider

There are a number of points that you should consider before entering into a salary sacrifice arrangement with your employer.

• The cost of the arrangement in terms of the loss of income, and its impact on other benefits accrued outside of salary sacrifice arrangements.
• How the cost of the arrangement compares with what value you could secure through purchasing the service or benefit yourself.
• The impact of engaging in this arrangement on your future pension for members of the NHS pension scheme (excluding only childcare voucher and cycle to work arrangements in  Scotland).
• How vital the arrangement is to you being able to work. This includes the need for necessary costs, including childcare vouchers.