SE42755 - Salary sacrifice: income tax effects of salary sacrifice

Section 19(1)1 ICTA 1988

For an explanation of what a salary sacrifice is see SE42750.

For a summary of the conditions that have to be met for a salary sacrifice to be successful see SE42760.

If a salary sacrifice is successful the employee will be taxed under Section 19(1)1 ICTA 1988 on the lower cash remuneration the employee gets and under the Schedule E benefits legislation on the cash equivalent, if any, of the benefit received. Note though that if the employee is able to give up the benefit at any time, and revert to the original (higher) cash salary, the benefit itself is chargeable under Section 19(1)1 following the principle established in Heaton v Bell (46TC211)(see SE00570). For an example of the tax effect of a successful salary sacrifice see example SE42785.

If a salary sacrifice is not successful the employee continues to be taxed under Section 19(1)1 on the higher level of cash remuneration the employee previously received with no cash equivalent under the benefits legislation. In this case the true construction of what has happened is that the employee continues to be entitled to the higher level of cash remuneration. The employee has merely asked the employer to apply part of that cash remuneration on the employee's behalf. For an example of the tax effect of a salary sacrifice that is not effective see example SE42786.