Would you make the sacrifice? 

August, 2023 - Shoosmiths LLP

Dan Sharman and Craig Thomas take a look at the tax treatment of salary sacrifice arrangements.


HMRC has always had a difficult relationship with salary sacrifice arrangements. On the one hand it acknowledges that such arrangements are a legitimate way of employees and employers reducing their tax liability, whilst on the other hand it has looked for ways in which to reduce the amount of tax leakage occurring from such arrangements.

Salary sacrifice arrangements are effected by a formal written variation or amendment to a contract of employment, such that the employee agrees to receive a lower salary in return for the provision of a non-cash benefit. Such arrangements used to result in a tax saving, because the tax payable on the non-cash benefit was less than the tax payable on the salary which the employee gave up.

However, HRMC has sought to reduce the circumstances in which such tax savings can arise through the introduction of legislation relating to optional remuneration arrangements (‘OPRA’) with effect on and from 6 April 2017. The legislation is brief but has the potential to give rise to unexpected tax charges. 

Whilst it has been in force for some time, OPRA is likely to become of increasing relevance for employers looking to take advantage of tax efficient remuneration structures in difficult and unstable market conditions. We are aware of a number of clients who are looking to introduce arrangements which involve rewarding employee with a non-cash benefit in return for foregoing a salary or bonus.

On the face of it, employers make cash flow savings if the provision of the benefit is cheaper than paying cash and employees may be tempted if the benefit is going to be more valuable in the long run (e.g. in the case of shares). However, these are the sorts of arrangements potentially caught by OPRA and therefore could lead to unexpected tax consequences.


OPRA capture two types of salary sacrifice arrangement:

‘Type A’ arrangements where an employee gives up the right or future right to receive earnings in return for a benefit; and

‘Type B’ arrangements where an employee agrees to be provided with a benefit rather than an amount of earnings.

OPRA therefore has the potential to capture arrangements other than the usual salary sacrifice arrangements described above. In particular, ‘Type B’ arrangements may apply in the case of employees who have the ability to choose between different benefit packages (either additional salary or non-cash benefit) which may arise in the context of a new hire or promotion.

Some benefits, such as pension contributions, continue to be excluded under OPRA and employers and advisors will need to be familiar with these exclusions, as a tax efficiency may still be achieved, if an employee enters into a legitimate salary sacrifice arrangement, where these benefits are being provided.

If the arrangement in question is either a Type A or a Type B arrangement and the benefit being provided is not excluded, then the effect of the OPRA rules is to make the higher of the cash amount foregone or the cash equivalent amount of the benefit subject to income tax and Class 1A NICs (and will usually need to be reported on form P11D).

Potential issues with OPRA

Example 1:  an employer gives an existing employee the choice to have a mobile telephone in return for the employee foregoing some salary to pay for some of the cost of the phone. 

This is likely a Type A arrangement as the employee has given up existing salary in return for a non-cash benefit. The provision of a mobile telephone is not a benefit which is excluded from OPRA, therefore the taxable amount is the higher of the cash amount foregone or the taxable amount of the benefit. The provision of a single mobile telephone by an employer is a tax-exempt benefit, so the cash equivalent amount of the benefit is nil. The taxable amount is therefore the amount of salary which has been given up. Whilst it may seem counterinitiative, this arrangement would lead to a tax charge arising, even though the non-cash benefit being provided is exempt from tax (which is not a good result for either the employee or the employer).

Example 2: an existing employee is promoted to a senior position and agrees a new remuneration package. The employee is given the choice of a company car (emissions exceeding 75g/km of C02) or additional salary. The employee chooses the company car. 

This is likely a Type B Arrangement as the employee has agreed to be provided with a non-cash benefit rather than additional salary. The provision of a company car (other than with ultra-low emissions) is not a benefit which is excluded from OPRA. Therefore, the taxable amount is the higher of the (modified in this case to ignore capital contributions) cash equivalent amount of the company car and the amount of salary given up. There is likely to be no tax benefit to the employer to this type of arrangement.

Example 3: let us use the previous example, but pretend that this is a new employee being hired for a senior position, the negotiated remuneration package includes a company car (emissions exceeding 75g/km of C02) and the salary is again adjusted because of this.

Again, this is likely a Type B Arrangement, as the employee has agreed to be provided with a non-cash benefit rather than earnings. It does not matter that this is a package being negotiated with a new employee as OPRA applies to arrangements entered into before or after the beginning of an employment. Therefore, the taxable amount is the higher of the cash equivalent amount of the company car and the amount of salary given up (see example 2).

Examples 2 and 3, give rise to a number of practical headaches. Remuneration packages for senior employees are often subject to negotiation and therefore a degree of choice by the employee is often exercisable. Practically, it is difficult to see how HMRC will work out the amount of earnings given up in these cases (if those earnings never existed in the first place). Working out the amount foregone is easy in respect of a traditional salary sacrifice arrangement, where the employee has actually given up something tangible in return for a non-cash benefit, as in example 1, but it is not so easy where the employee has given something up they were never entitled to (they only might have received). 

If other areas are anything to go by, HMRC will look at this issue in the round and consider all of the relevant factors, before making a judgment as to what earnings have been given up in these cases, and in doing so presumably HMRC would have to reach a judgment based on what the employee would have been paid by an employer on arm’s length terms in similar circumstances (similar to the pricing adjustment mechanisms it would adopt under the transfer pricing rules regime). In our view, the key here is to make sure the remuneration package is finalised before any contracts are signed and crucially that no choice is built into the employment contract itself.

Example 4: an employer decides he needs to incentivise a key employee. The employer enters into talks with the key employee to negotiate a remuneration package. The employee is given the option of a bonus or growth shares. The employee opts for the growth shares. These are non-voting, do not carry a right to receive a dividend and entitle the employee to participate in the capital of the company, if the company is wound up or sold, but only if the company is worth a certain amount at that point (the ‘hurdle amount’).

Employers commonly use shares to retain and incentivise key members of staff (and this method is only likely to become more popular in times of economic uncertainty where many employers are concerned about cash and cash flow, as this method of providing a benefit can often be done at little cost to the employer – in reality it is the shareholders who really provide the benefit through a dilution of their shareholdings). 

Growth shares are sometimes preferred because at the point they are issued they have little or no market value (because the company is worth less than the hurdle amount). Accordingly, there is nothing to tax as general earnings at the point the shares are acquired (and a future charge under Part 7 of the Income Tax (Earnings and Pensions) Act 2003 would usually be avoided by entering into an election under Section 431 of that Act). However, there is a risk that such an arrangement would fall within a Type B arrangement as the employee has agreed to be provided with a non-cash benefit rather than earnings. Therefore, there would be a taxable amount under OPRA equal to the higher of the bonus which the employee has given up and the cost to the employer of the benefit being provided. 


HMRC has tried to cover all bases when it comes to salary sacrifice arrangements and unfortunately this comes at a cost, the cost being that the legislation introduced to combat the use of such arrangements creates a number of legal and practical uncertainties in its application. Employers and advisors will need to be mindful of this and should obtain legal advice before agreeing or revising remuneration or incentive packages with existing or potential employees. Employers and advisors should also be aware that just because the value of the benefit being provided to an employee is negligible this no longer necessarily negates the risk of an immediate tax charge, if the employee has given up earnings in return for the benefit.


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