The Inland Revenue has published guidance notes on salary sacrifice to help employers understand the principles of salary sacrifice and how the arrangements entered into with employees may affect the tax liability on their remuneration package.

The guidance sets out when a sacrifice will be effective for tax purposes and when it will not, and further goes on to explain the interaction of salary sacrifice with entitlement to tax credits and earnings related/contribution related State Benefits such as Maternity Pay. It should provide a useful summary for employers and employees into the basic elements of a salary sacrifice scheme, but the guidance does make clear the need for employers to take professional advice about this subject.

The conditions which must be in place for salary sacrifice to be effective for tax purposes are conditions which would indicate that the contractual right to cash pay has been reduced. The two conditions that must be met are:

• The potential future remuneration must be given up before it is treated as received for tax and NIC purposes; and
• The true construction of the revised contractual arrangement between employer and employee must be that the employee is entitled to lower cash remuneration and a benefit in kind.

Arrangements will not be effective if they amount to the employee asking the employer to apply part of his cash remuneration to the payment for a benefit on the employee's behalf.

The new guidance makes it clear that the Inland Revenue will not give tax clearance to salary sacrifice schemes before they have been implemented; there is also a good summary of the information the employer will need to provide to the Inland Revenue on this topic.Links: The new guidance is available as a PDF is at
http://www.inlandrevenue.gov.uk/specialist/salary_sacrifice.pdf