Legal Aspects of Salary Exchange/ Sacrifice

As salary exchange involves exchanging salary for some non-cash benefit, it can only take place when there has been a legally enforceable change to the terms of the employment contract.

So, both the employer and employee must agree to the change, and it should be evidenced with a written agreement or addendum to the contract.

Employers can achieve this using

• a negative affirmation approach – often referred to as ‘smart scheme’ when done on a large scale
• a positive affirmation approach -asking employees to explicitly agree by signing the necessary documentation.

Some employers include salary exchange conditions in the initial employment contract, so further documentation is not required.

Any subsequent change to the salary exchange agreement should also be evidenced by a further alteration to the contract terms. However, it may not always be necessary to make such an amendment, if the agreement states how certain events should be dealt with. These are normally termed ‘lifestyle events’ and include things like marriage, divorce, redundancy and pregnancy which may allow the agreement to be temporarily suspended or opted out of completely.

Outside of this, employees should not be able to opt in and out of salary exchange agreements on an ad hoc basis. If they can, the exchange may not be effective for tax purposes.

Salary exchange affects the employee’s terms and conditions of employment and is a matter of employment law, not tax or pensions law. We therefore recommend you seek legal advice from an Employment Solicitor.

Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change.

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