Salary Sacrifice

1. Introduction

Section 118B Taxes Consolidation Act 1997 deals with the issue of salary sacrifice. The section came into effect on 31 January 2008.

This section;

• copper-fastens on a legislative basis Revenue's administrative practices for Benefit-in-kind exempt 'Travel Passes' and the treatment that applies in relation to employee contributions to approved profit share arrangements that have been in place for a number of years and
• ensures that any other salary sacrifice arrangements are subject to PAYE and PRSI.

2. Revenue's position

An article on the administrative practice for bus and train passes was originally published in Tax Briefing Issue 41 in 2000. This article supersedes that article.

Revenue's position is that salary sacrifice arrangements do not reduce an employee's taxable income. If an employee forgoes any remuneration by way of any arrangement, either by changing the existing terms or contract of employment or creating new terms or contract of employment, or indeed if there are no recorded terms and conditions in relation to the employment, the employee will remain taxable on their 'gross' income.

Remuneration sacrificed is to be considered as an application of the income earned by an employee rather than an expense incurred by that individual's employer. The only exceptions are the two schemes provided for in Section 21 Finance Act 2008.

3. What is new

3.1. This section provides a clear legislative basis for the Revenue approved administrative practices in respect of the two existing salary sacrifice arrangements, namely:

• Benefit-in-kind exempt 'Travel Passes' - as provided for in Section 118(5A) of the TCA - provided by employers to employees where there is a corresponding reduction in the employees' remuneration. Under the scheme, an employee is not charged to either tax or PRSI on the remuneration sacrificed, and the employer saves on employer PRSI contributions in respect of the employee.(See http://www.taxsaver.ie/)
• Similarly, the section confirms the treatment that applies in relation to employee contributions to approved profit share arrangements set up by employers under Section 510 of the TCA. Under the scheme employees may forgo up to 7.5 percent of basic salary towards the purchase of shares. Shares appropriated to an employee under such a scheme are exempt from a charge to tax by virtue of Section 510(4) TCA.

Hereafter these two schemes are referred to as 'exempt employee benefits'.

3.2. To qualify the remuneration sacrificed must be from the same year of assessment as the year in which the exempt employee benefits are provided.

3.3. In all other circumstances where any salary sacrifice arrangement is in place, the salary sacrificed is treated as remuneration of the employee and is taxable as such. The employer must operate PAYE/PRSI on the amount of remuneration foregone.

3.4. There is also provision in the new section to prevent any attempts that might be made to circumvent the intent of the section either by employers providing benefits to connected persons or by reimbursing employees for remuneration forgone.

3.5. Remuneration is not restricted solely to cash remuneration but includes all forms of remuneration arising from the holding of an office or employment. This includes bonus payments and any form of discretionary payment.

4. Anti-abuse

The legislation provides for a number of anti-abuse provisions to ensure that the provision is only applied in the manner in which it was intended. These are:-

• Where the exempt employee benefit is provided to a spouse or connected person, rather than an employee, it will not be treated as an exempt employee benefit, but the value of the benefit will be treated as salary sacrificed by the employee and taxed accordingly.
• Where an employee, as part of an arrangement, is provided with both an exempt employee benefit and a compensating payment in return for the salary sacrificed, then the exemption status conferred by Section 118B will not apply and the income sacrificed will be taxed in full.
• It should also be noted that the legislation provides that any exempt employee benefit provided for a year before the year of claim will not be effective. Specifically, where income is not paid during the year (e.g. a bonus, commission or other income which only arises after the end of the year) such income cannot be taken into account for the purposes of an exempt employee benefit scheme.

5. Tax treatment of salary sacrifice arrangements

Where an employee forgoes any remuneration in return for any benefit, then the legislation in relation to salary sacrifice applies (i.e. Section 118B of the TCA) and the remuneration sacrificed is taxable in full under Schedule E, unless the benefit provided is an exempt employee benefit.

6. Tax treatment of benefit-in-kind and salary sacrifice arrangements

6.1. Where an employer provides a benefit, directly or indirectly, at a cost to that employer, then the resulting benefit is taxed as a benefit-in-kind in the hands of the employee in accordance with Section 118 of the TCA.

6.2. There are a number of rules for benefit in kind set out in tax legislation on;

• the exemption of specific items from the benefit in kind charge.
• the calculation and valuation of benefit in kind in specific instances.
• the reimbursement of the cost of the benefit by an employee out of net salary.

6.3. In circumstances where the costs of the provision of a benefit are partly borne by the employer, with the balance borne by the employee under a salary sacrifice arrangement, there will be a charge to tax because of Section 118B (salary sacrifice). However, the only double charge that could arise would be to a benefit-In-kind charge under Section 118. That charge applies 'to so much of the expense as is not made good to the body corporate by the director or employee...' - so the 'double charge' would be reduced as the employee has given salary to his/her employer for the benefit received under the salary sacrifice arrangement.

It should also be noted that all remuneration provided by an employer is taxable unless specifically exempted by a provision of tax legislation.

7. Examples

A number of examples are given below showing how the salary sacrifice legislation works. It should be noted that this list is not exhaustive and any specific circumstance will be examined in the light of the individual taxpayer's conditions.

Examples of arrangements subject to tax.

• Attempts to circumvent the limits imposed on personal contributions to pension schemes by forgoing salary and transferring the contribution from the hands of the employee to the employer.
• Employees forgoing salary to enable their employer make partial or full contribution to the costs of childcare.
• Reimbursing an employer by sacrificing salary in return for the for provision of benefits, like motor cars.
• Provision of life cover.
• Provision of golf club or gym membership.

The legislation confirms Revenue's view that such arrangements have always given rise to a tax charge.

Examples of arrangements not affected by the introduction of this legislation.

The reason these schemes are not affected is because earned income is not being sacrificed in return for a benefit.

• Unpaid leave / leave in lieu arrangements.
• Employee Assistance programmes.
• Course and exam fees.
• Benefit in kind charge in respect of medical insurance premiums paid by employer

Set out below are a number of worked examples of how it is intended that the new legislation would apply :-

Example 1 (salary forgone equals value of benefit)

Example 2 (salary forgone is less than value of benefit)

Example 3 (salary forgone is greater than value of benefit)

Example 4 (salary forgone equals value of an exempt benefit other than those mentioned in S118B(2)(a))

8. New or renegotiated contracts.

The legislation covers any arrangement made between an employer and an employee. Therefore, an employee who enters into any arrangement with their employer to forego remuneration and receive any part of the remuneration due under the terms or contract of employment as a benefit, either by way of new or renegotiated terms or contract, is subject to the legislation.

9. Pension contributions

Where an employee foregoes remuneration in return for an increased pension contribution by the employer, such an arrangement will be subject to the provisions of Section 118B.

10. Clarifying if a scheme is in operation in a workplace

Salary sacrifice schemes may also be known as Flexible Benefits Packages or Flexi-Plans. In general, the scheme will require an employee to agree to revised terms in relation to their terms or contract of employment whereby a benefit is provided in return for a reduction in take-home pay. Such schemes may be subject to the salary sacrifice legislation and should be examined in relation to the legislation.