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Optional Remuneration Arrangements

Optional Remuneration Arrangements can be complex, that’s why our in-depth guide explores all you need to know.

Salary sacrifice schemes have often been a popular perk for employees and employers alike. However, in 2017 the scheme received a shake up and was replaced with Optional Remuneration Arrangements instead. The aim of this change was to limit the amount of tax which could be saved by the employer/employee.

Optional Remuneration Arrangements – what is it?

Optional remuneration arrangements were brought in to replace salary sacrifice, which was where the employee chose to give up some of their salary in exchange for a benefit in kind, for example a phone or a company car.

The employee would pay income tax on the value of the benefit in kind and the employer would pay Class 1A National Insurance on this value.

Background to the changes

 The issue with these types of arrangements were that the taxable benefit amount could be less than the value of the salary that an individual had given up.

The effect of this is that there would be less Income Tax and National Insurance payable by both the employer and the employee than there would be if the arrangement had not been entered into.

The government first noted their concern at the increased use of salary sacrifice arrangements at the Budget 2015, monitoring this over the following year and announcing a consultation on limiting the advantages of these at Budget 2016.

Details of the consultation can be found here.

What’s new?

From 6 April 2017 changes to the legislation (ITEPA 2003) meant that the value of any P11d benefit for any salary sacrifice arrangement will be the higher of:

a) The amount of salary sacrificed; or
b) The usual value of the benefit in kind

This in effect removes the tax saving by ensuring that the amount subject to tax at least equal to the amount of salary forgone.

For any employees already using salary sacrifice arrangements, these are protected for the length of that contract so there will no changes until a new arrangement is entered into. There are some exceptions for cars, accommodation and school fees.

There are also exemptions in Part 4 ITEPA for the following types of arrangements:

  • employer provided pension saving 
  • employer provided pensions advice 
  • childcare vouchers 
  • workplace nurseries 
  • directly contracted childcare 
  • cycle to work schemes 
  • ULEVs emitting 75g CO2/km or less 

Note that there is still no employee’s NI payable on a benefit in kind, so there is still some benefit to employees in having these arrangements.  The employer will pay Class 1A NI on the benefit value so will pay the same amount as they would if the employee had opted to keep their salary.

Are there any disadvantages?

Below are a number of potential pitfalls of the scheme:

  • Such sacrifice schemes often run for a full year or longer. You should check how long you are committing to this change in your earnings.
  • You cannot enter a salary sacrifice that takes your pay below the National Minimum Wage or National Living Wage, if appropriate.
  • Your earnings will be at that lower level for all other tax and benefit purposes, so you need to make sure that if your earnings fall below the lower earnings limit (£120 per week for 2020/21) you will no longer be credited with Class 1 NICs that could result in certain benefits being restricted (for example state pension, maternity allowance, incapacity benefit and contributions-based Jobseekers Allowance).
  • Your earnings may or may not be reduced for the purposes of tax credits and Universal Credit. For tax credits purposes any such reduction depends on the reason for the sacrifice, and it is not yet clear for universal credit purposes.
  • Your earnings will be at that lower level for all other employment purposes, for example, statutory sick pay and statutory maternity/paternity/adoption pay.
  • Your earnings will be reported at that level if you need to apply for a loan, for example, although your employer may be prepared to explain the effect of the salary sacrifice.

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