Guernsey: Statement of Practice - Income tax treatment of salary sacrifice arrangements

Written by Ian Congreave - Filed under: Guernsey, Region Specific on November 4th, 2009

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In Statement of Practice 34, the Income Tax Office has made it clear that, where part of an employee’s cash remuneration is given up in return for a non-cash benefit that has a lower taxable value than the tax that would otherwise have due on the amount of salary sacrificed, the salary sacrifice is tax neutral. The tax charge would be equivalent to that which would have been charged on the salary.

The Guernsey income tax position, therefore, is that, if an employee would receive less taxable remuneration under a salary sacrifice arrangement than would arise if the salary sacrifice was not implemented, the employee will continue to be taxable for Guernsey income tax purposes on the original gross taxable pay as if the sacrifice had not occurred.

In a salary sacrifice situation, if the benefit received by the employee gives a lower tax liability than would arise on the amount of the salary sacrificed, the employee is taxable on the original gross taxable pay as if the sacrifice had not been made. To avoid double taxation, the benefit that is provided in place of the salary is not then taxable.

However, if the benefit provided is a contribution by the employer to an occupational pension scheme, the employee is still entitled to a deduction from earnings in respect of the contributions that the employee makes (but only up to 15% of earnings). As the amount of salary sacrificed is still being treated as earnings but is being used to make a contribution to an approved occupational pension schemes, that contribution is treated as a contribution by the employee and qualifying for tax relief up to 15% of earnings.

In reverse, if the amount of taxable earnings after the salary sacrifice, plus the valuation of the benefit, comes to a higher figure than the original gross taxable remuneration before the salary sacrifice took place, the employee would be taxed on the higher figure. However, any contribution made by the employee will be taken into account in ascertaining the amount of the benefit chargeable to tax.

Further information:

Guernsey income tax treatment of salary sacrifice arrangements