Salary Sacrifice

There are often situations where an employee would prefer their bonus to be redirected into something more tax advantageous to them, such as their pension. With the removal of pension funding limits on employer contributions into PRSAs, this has come more to the fore recently. The Revenue are wise to any of the tricks that you may think of to reduce the tax that you pay and they receive and they don’t allow it. The Revenue have just updated their guidance on salary sacrifice

What is salary sacrifice?

It is where an employee forgoes part of their remuneration due under their terms or contract of employment and in return their employer provides a benefit. It is not completely illegal and there are a number of Revenue approved salary sacrifice arrangements:

  1. Travel passes
  2. Exempt shares appropriated under approved profit sharing scheme
  3. The bike scheme

Where such schemes are in place:

  1. There must be a bone fide and enforceable alteration to the terms and conditions of employment.
  2. The alteration must not be retrospective and must be evidenced in writing.
  3. There must be no entitlement to exchange the benefit for cash.

Under these schemes, the employee must be the beneficiary of the salary sacrifice. Buying a bike that your son is going to use to cycle to school isn’t allowed!

Unapproved salary sacrifice

The Revenue are onto the tricks that people may think of. So unless it is one of the three approved salary sacrifice schemes, there is no changing your contract to have that bonus paid into your pension instead of being paid as salary. Even if your bonus is discretionary, your employer cannot redirect it into your pension. If the salary sacrifice is not Revenue approved, the income sacrificed remains taxable under PAYE.

Company owners

The area of salary sacrifice revolves around the alteration of terms and conditions of employment. Most owners of small companies do not have a contract of employment. Their income can be more variable, so it is not as clear if a company owner making large contributions to their pension is deemed salary sacrifice*.

 

Steven Barrett

29 January 2024

 

*This is not to be taken as tax advice and you should consult with your tax advisor.