RPSM15101070 - Technical Pages: Special annual allowance: £130,000 limit: Relevant income - step 5

This guidance only applies for the 2009-10 and 2010-11 tax years.

How to calculate relevant income: step 5 - salary sacrifice

Salary sacrifice is where an employee’s employment income is reduced in exchange for the employer providing some other benefit. In this context, the employee’s remuneration is reduced in exchange for a pension contribution by the employer. This includes a reduction in exchange for a pension contribution to an employer-financed retirement benefits scheme.

This step applies only if the salary sacrifice was agreed on or after 22 April 2009.

For the purpose of calculating the income of an individual to compare with the £130,000 limit, add back to the amount found after Step 4 (see RPSM15101060) any amount which has been agreed between the employee and the employer as being sacrificed in exchange for employer pension contributions.

For this purpose, ‘a pension contribution by the employer’ means an individual’s employer, or some other person,

• agreeing to pay contributions (or additional contributions) to a pension scheme in respect of the individual, or
• agreeing to secure increased benefits under any pension scheme, whether by a contribution or by some other means, to which any of the following have an actual or prospective entitlement

• • the individual
  • a dependant of the individual, or
  • any person connected with the individual.

Section 993 of the Income Tax Act 2007 defines a ‘connected person’ for this purpose.

Special rules apply for determining whether an individual has relevant income of £130,000 or more for the tax year 2009-2010, or a later tax year. Subject to certain conditions, only salary sacrifice agreements made on or after 9 December 2009 are taken into account as part of the relevant income calculation (a salary sacrifice agreement made on or after 22 April 2009 but before 9 December 2009 can be excluded). For more details see RPSM15101075.

A ‘salary’ sacrifice agreed on or after 22 April 2009 would also include the sacrificing (in exchange for a pension contribution by the employer) of other types of payments that might otherwise have been chargeable to tax as employment income, such as a bonus sacrifice or a redundancy sacrifice.

Salary sacrifice arrangements made by each employee under an ‘umbrella’ salary sacrifice scheme set up by an employer before 22 April 2009 are not necessarily always going to be pre-22 April 2009 salary sacrifice arrangements that, therefore, do not need to be added back under this Step 5. The date the individual makes the salary sacrifice under the umbrella scheme will determine whether it is a pre-22 April 2009 salary sacrifice or not.

If the salary sacrifice under the umbrella scheme has to be renewed by the individual annually, for example, any salary sacrifice linked to pension arrangements relating to a renewal made on or after 22 April 2009 will have to be added back.

However, an individual would still have a pre-22 April 2009 salary sacrifice agreement where that pre-22 April 2009 agreement has a ‘default clause’ that means the existing agreement pre-22 April 2009 salary sacrifice level will continue in the absence of any renewal made by the individual.

An employer pension contribution which is not linked in any way with a salary sacrifice is not included in the individual’s total income amount.