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Overview
The Private Medical (Salary Sacrifice) benefit type allows employers to payroll private medical benefits that are provided through a salary sacrifice arrangement. HMRC refers to these as Optional Remuneration Arrangements (OpRA).
Under OpRA rules, where an employee gives up salary in exchange for private medical cover, the taxable value of the benefit is not always the standard calculated Benefit in Kind (BIK) value. Instead, the taxable value is the higher of:
- the standard calculated BIK value of the benefit (the cost of providing the cover), before any employee contributions, and
- the amount of salary foregone (the salary sacrifice amount).
Any employee contributions are then deducted from the higher value to give the final Cash Equivalent.
The Salary Sacrifice benefit type is separate from the standard Private Medical benefit. The standard Private Medical benefit type remains unchanged, and both benefit types can be used independently within the same company.
As with all benefits in the BIK Module, the Salary Sacrifice benefit is calculated and payrolled on a tax year basis (6 April to 5 April). Salary sacrifice arrangements often run for a different period, such as a policy year starting part way through a tax year. Regardless of the length of the arrangement, the salary sacrifice amount entered in the BIK Module must reflect only the amount of salary given up within the current tax year. The OpRA comparison, the Cash Equivalent and any payroll deductions are all based on these tax year figures.
Optionally, the BIK Module can also generate the salary sacrifice deduction in payroll automatically. The deduction is based on the salary sacrifice amount that applies to the current tax year, spread across the pay periods remaining in that tax year. This removes the need to key the deduction manually each pay period.
Employers remain responsible for confirming that each employee is eligible for a salary sacrifice arrangement. This includes making sure the sacrifice does not take their pay below the National Minimum Wage or National Living Wage.
As with the standard Private Medical benefit, there are three ways the benefit can be provided. The method is selected using the Event Type when the company benefit is configured, and determines the HMRC tax and National Insurance treatment, which is applied automatically:
| Event Type | Tax Liability |
National Insurance Liability |
|---|---|---|
|
You arrange and pay the provider directly for treatment or insurance The employer both sources and settles the cost |
Payrolled across the year |
Class 1A |
|
Your employee arranges treatment or insurance, but you pay the provider The employee selects the service, but the employer settles the payment |
Payrolled across the year |
Class 1 through payroll |
|
You reimburse your employee's costs The employee pays for the service and is reimbursed by the employer |
PAYE through payroll |
Class 1 through payroll |
For more information on each method, see Private Medical Treatment or Insurance.
Important: Salary sacrifice amounts must be configured around the tax year, not the length of the employee's salary sacrifice agreement or policy year. Before applying the benefit, work out how much salary the employee will give up in the current tax year. This runs from the benefit start date, or 6 April if later, to 5 April. Enter this figure, not the total value of the agreement or a standard 12-month figure.
Important: Before configuring this benefit, review the Configuring Company Benefits and Applying Benefits to Employees: Manual & Data Imports articles. The Salary Sacrifice benefit follows the same setup process as the standard Private Medical benefit, with the additional steps covered in this article.
Contents
- Before You Begin: Configuring a Salary Sacrifice Payment Type
- Setting Up the Salary Sacrifice Company Benefit
- Applying the Salary Sacrifice Benefit to an Employee
- How the Taxable Value is Calculated (OpRA)
- Salary Sacrifice Deductions in Payroll
- Appendix
Before You Begin: Configuring a Salary Sacrifice Payment Type
This step is only required if the salary sacrifice deduction is to be added to payroll automatically. If deductions will continue to be handled outside the BIK Module, skip to the next section.
Important: It is the employer's responsibility to confirm that an employee is eligible to enter a salary sacrifice arrangement before the benefit or deduction is applied. This includes making sure that the salary sacrifice does not reduce the employee's cash earnings below the National Minimum Wage or National Living Wage. The BIK Module does not check for this. The automated salary sacrifice deduction should only be used where the employer has confirmed that the arrangement is valid and that the employee's pay will remain compliant after the deduction is applied. Employers should also make sure that a valid salary sacrifice agreement is in place with the employee, reflecting the agreed change to their contractual pay.
For the BIK Module to generate the deduction, a payment type must exist in Payroll that is:
- Enabled for the company that the benefit will be created under
- Configured with Include In API Calls ticked
To configure the payment type, go to:
- Payroll Module > Administration > Payment Types
- Select Add New Payment Type, naming the payment type something relevant to a Salary Sacrifice Private Medical deduction
- Configure by ticking the boxes for:
- Taxable
- National Insurance
- One-Off Payment Type
- Include In API Calls
These are the minimum settings required for the payment type to be used as a salary sacrifice deduction. Users can update the payment code, or configure any other settings on the payment type, as required by their organisation.
- Select Save
- Return to the payment type, and ensure the payment type is assigned to the relevant Company by selecting Assign PAYE Company.
Only payment types that are both assigned to the company and have Include In API Calls ticked will appear for selection on the company benefit. If a payment type is later unticked from Include In API Calls, or removed from the company, it is removed from any company benefit it was selected on. The benefit cannot be re-saved until a valid payment type is selected.
Setting Up the Salary Sacrifice Company Benefit
To add the Salary Sacrifice benefit to a company, go to:
- BIK > Administration > Company Benefits and select the relevant Company
- Select Add New Benefit
- Select Private Medical (Salary Sacrifice) as the HMRC Benefit Type
- Select the Event Type that reflects how the private medical benefit is provided. This sets the tax and National Insurance treatment shown in the table in the Overview, and cannot be changed once the benefit has been processed through payroll
- Complete the standard fields as covered in Configuring Company Benefits:
- Benefit Name - enter a name for the benefit suited to the company, 'Salary Sacrifice Private Medical' for example
- Notes - optional area for additional information
- Default Stop Date For Leavers - mandatory setting for how the benefit is treated when an employee becomes a leaver
- Set Default Amount - optional default annual cost of the private medical cover, which can be overridden at employee level
- Review the Automatically Add Salary Sacrifice Deduction to Payroll? checkbox:
- Unticked - no deduction will be generated. The benefit will still be payrolled and the OpRA comparison will still apply, but the salary sacrifice deduction must be handled outside the BIK Module
- Ticked - a Payment Type field is displayed and becomes mandatory. Select the salary sacrifice payment type configured earlier
- Select Save
The benefit will now display in the company benefit list and be available for selection at employee level. Salary Sacrifice benefits can be added to Benefit Groups in the same way as any other benefit, and employee eligibility rules will apply. See Configuring Benefit Groups.
If Automatically Add Salary Sacrifice Deduction to Payroll? is ticked and no payment type is selected, the benefit cannot be saved and the message "Please select a Payment Type" will display. If no payment types appear in the dropdown, check the payment type configuration in the section above.
Applying the Salary Sacrifice Benefit to an Employee
To apply the benefit to an employee, go to:
- BIK > Employees > Employee List > find and select the Employee
- Select Add
- Select the Salary Sacrifice benefit under Benefit Name
- The Benefit Name shown at employee level is the name chosen when the benefit was configured at company level
- Complete the standard benefit fields, such as Start Date, Amount (the annual cost of providing the cover) and any Employee Contributions, in the same way as the standard Private Medical benefit
In addition to the standard fields, the following salary sacrifice fields are available:
-
Salary Sacrifice (Annual)
- Mandatory
- The amount of salary the employee will give up in exchange for private medical cover within the current tax year
- Where the arrangement starts or ends part way through the tax year, enter only the amount that falls within the tax year, not a full 12-month figure
- Accepts positive monetary values only, up to two decimal places. Zero (0.00) is accepted
-
Amount Sacrificed So Far (YTD)
- Non-Mandatory
- The amount of salary already given up in the current tax year that has not been processed through Fourth payroll. For example, this applies when migrating from a previous payroll provider part way through the tax year
- Do not include amounts sacrificed in previous tax years
- Cannot be higher than the Salary Sacrifice (Annual) amount
-
Total YTD / Sacrificed To Date
- Read-only
- Displays the amount sacrificed so far in the current tax year. This includes any Amount Sacrificed So Far (YTD) entered, plus amounts processed through Fourth payroll. The field updates each time a payrun is closed
Example:
An employee joins a salary sacrifice private medical scheme starting 6th April 2026, giving up £100 per month. The policy ran throughout the whole tax year:
- Annual Sacrifice Amount: £1200.00
- Enter £1200.00 as the Salary Sacrifice (Annual)
For a monthly-paid employee whose benefit starts in period 1, the automated deduction (if used) would be £1200.00 / 12 remaining periods = £100.00 per period, matching the agreement.
- Select Save when complete
The Cash Equivalent is calculated automatically using the OpRA rules below, and the benefit is applied to payroll.
How the Taxable Value is Calculated (OpRA)
The OpRA calculation is applied as a decision layer on top of the standard BIK calculation.
Both sides of the comparison relate to the current tax year only. The standard BIK is prorated for the days the benefit is provided within the tax year. The salary sacrifice side uses the amount entered for the current tax year. Entering a full-year or full-agreement figure for a part-year arrangement would therefore overstate the taxable value.
- The standard BIK is calculated in the normal way, using the cost of providing the cover, before any Employee Contributions
- The OpRA value is the Salary Sacrifice (Annual) amount
- The higher of the two values is used
- Any Employee Contributions are then deducted from that value to give the Cash Equivalent
Which Value is Higher |
Value Used (before Employee Contributions) |
|---|---|
Salary Sacrifice lower than Standard BIK |
Standard BIK |
Salary Sacrifice equal to or higher than Standard BIK |
Salary Sacrifice |
Example 1: Salary sacrifice is higher
An employee has private medical cover for the full tax year (6 April to 5 April). The cost to the employer is £1,000.00, as the employer benefits from a group discount. Under the agreement, the employee sacrifices £1,200.00 within the tax year, and is paid monthly. There are no employee contributions.
- Standard BIK = £1,000.00
- Salary sacrifice = £1,200.00
- The salary sacrifice is higher, so the Cash Equivalent is £1,200.00, payrolled as £100.00 notional pay per period over 12 periods
- Salary sacrifice deduction (if enabled): £1,200.00 / 12 = £100.00 per period
Example 2: Standard BIK is higher
An employee has private medical cover for the full tax year, costing the employer £1,500.00. Under the agreement, the employee sacrifices £1,200.00 within the tax year, and is paid monthly. There are no employee contributions.
- Standard BIK = £1,500.00
- Salary sacrifice = £1,200.00
- The standard BIK is higher, so the Cash Equivalent is £1,500.00, payrolled as £125.00 notional pay per period over 12 periods
- Salary sacrifice deduction (if enabled): £1,200.00 / 12 = £100.00 per period
The Cash Equivalent always represents the final taxable value for the tax year and remains the single value used by payroll.
The notional payment and the salary sacrifice deduction are separate values and will not always match.
On-Screen Guidance
To help users understand which value has been used, the following guidance is displayed on the employee benefit record. These messages are informational only and do not block any actions.
- Hovering over the ? icon at benefit level displays:
- "Salary Sacrifice (OpRA) applies to this benefit. The taxable value is the higher of the calculated benefit and the amount foregone."
Salary Sacrifice Deductions in Payroll
Where Automatically Add Salary Sacrifice Deduction to Payroll? is ticked on the company benefit, a salary sacrifice deduction is created in payroll when the Payroll Preview is generated. The deduction:
- Is created as a negative payment using the Payment Type selected on the company benefit
- Is calculated as the Salary Sacrifice (Annual) amount for the current tax year, less the Total YTD / Sacrificed To Date (the Amount Sacrificed So Far (YTD) plus amounts already processed through Fourth payroll), divided by the number of pay periods remaining in the tax year
- Applies only while the benefit is active, and stops when the benefit stops
The deduction only ever recovers the salary sacrifice amount entered for the current tax year. Once the Total YTD / Sacrificed To Date reaches the annual amount, no further deductions are generated in that tax year, even if the employee's agreement continues.
To view the deduction, go to:
- Payroll > Employees > Employee List > find and select the Employee > View Payroll Summary > Payments
The salary sacrifice deduction and the notional BIK payment are two separate values in payroll, and they will not always match.
- The salary sacrifice deduction is the per period amount of salary the employee is giving up, based on the Salary Sacrifice (Annual) amount for the current tax year.
- The notional payment is the taxable value of the benefit, based on the Cash Equivalent. How it is treated for tax and National Insurance depends on the Event Type selected on the company benefit.
The Cash Equivalent is decided by the OpRA comparison, so the notional payment depends on which value was used:
- Standard BIK used - where the standard BIK is higher, the notional payment is based on the standard BIK, less any employee contributions, and will usually be higher than the deduction.
- Salary sacrifice used - where the salary sacrifice amount is higher, the notional payment is based on the salary sacrifice amount, adjusted for any employee contributions. It may be equal to, or lower than, the deduction.
When the payrun is closed, the Total YTD / Sacrificed To Date field on the employee benefit record updates with the amount processed.
If the employee changes pay frequency during the tax year, the deduction is recreated for the new pay frequency and recalculated over the pay periods remaining in the tax year.
Appendix
The sections below cover edge case scenarios that may arise after a Salary Sacrifice benefit has been set up and applied to an employee. These include:
- Changes to the arrangement during the tax year
- Employees leaving
- Payroll rollbacks
- Deleting a benefit
- Editing the Default Stop Date For Leavers setting after a benefit has been processed
Each scenario explains how the BIK Module recalculates the Cash Equivalent and any salary sacrifice deductions, so that payroll stays accurate for the current tax year.
Changes During the Tax Year
The Cash Equivalent recalculates automatically when the salary sacrifice amount, benefit cost or benefit dates change. Updated values apply to future payroll runs only. Any amount over or under payrolled is corrected across the pay periods remaining in the tax year.
- Changing the salary sacrifice amount: Update the Salary Sacrifice (Annual) field to the revised total for the current tax year, including amounts already sacrificed, and select Save. The OpRA comparison is re-run. Where the deduction is automated, the next available pay period uses the new annual amount, less the amount already sacrificed, divided by the pay periods remaining
- Changing the cost of cover: Where the cost of the cover changes, for example at policy renewal or when dependants are added, update the benefit Amount and select Save. The OpRA comparison is re-run. If the employee's salary sacrifice also changes, update the Salary Sacrifice (Annual) amount at the same time
- Amending the Amount Sacrificed So Far (YTD): This can be amended at any time, including after payruns have closed. The deduction is recalculated going forward
- Starting the benefit later in the year: Enter only the salary sacrifice amount that falls between the benefit start date and 5 April. The standard BIK is prorated for the days the benefit is provided and compared against that salary sacrifice amount. The resulting Cash Equivalent, and any automated deduction, is applied from the start period across the remaining pay periods
- Arrangement ending part way through the tax year: Where the agreement ends before 5 April, the Salary Sacrifice (Annual) amount should include only the salary given up to the end date. Enter a stop date against the benefit, so that the standard BIK is also prorated to the same date
Where an agreement continues into the next tax year, the salary sacrifice amount must be reviewed for the new tax year, so that it reflects only the salary to be given up between 6 April and 5 April.
Leavers
When a termination date is entered for an employee with a Salary Sacrifice benefit:
- The automated salary sacrifice deduction stops from the termination date
- The Salary Sacrifice (Annual) amount is set to match the amount sacrificed to date in the current tax year
- The benefit stop date is set according to the Default Stop Date For Leavers setting on the company benefit, and the Cash Equivalent is recalculated across the remaining pay periods
Payroll Rollbacks
When a payrun is rolled back:
- Salary sacrifice deductions for the rolled back period(s) are removed, and the Total YTD / Sacrificed To Date is reduced accordingly
- The deductions are reapplied when the payrun is re-run and closed
- If the Salary Sacrifice (Annual) amount is changed after a rollback, the next payroll close uses the new amount, less any Amount Sacrificed So Far (YTD), divided by the pay periods remaining in the tax year. The pre-rollback deduction value is not carried over
Deleting a Salary Sacrifice Benefit
An employee's Salary Sacrifice benefit can be deleted provided it has not been processed through payroll. If it has been included in a payroll run, roll back payroll to the period in which the benefit was first applied, and then delete it.
A company-level Salary Sacrifice benefit cannot be deleted while it is assigned to employees and has been payrolled. The Delete button will be disabled with the message "This benefit cannot be deleted as it has been assigned to employees and payrolled." Once all employee benefit records using it have been rolled back and deleted, the company benefit can be deleted. See Deleting a Company Benefit.
Editing Default Stop Date for Leavers After Processing
This change applies to all company benefit types, not only Salary Sacrifice benefits.
The Default Stop Date For Leavers setting on a company benefit can now be edited after the benefit has been processed through payroll. HMRC Benefit Type and Event Type remain locked once processed.
To edit the setting, go to:
- BIK > Administration > Company Benefits > select Company
- Select the required Benefit
- Update Default Stop Date For Leavers as required
- Select Save
The new setting only applies to employees who have a termination date added after the change is saved. Employees with an existing termination date are not affected, and their benefit stop dates are not recalculated. Where the setting is changed more than once, each employee's benefit uses the setting that was active when their termination date was added.
Changes to this field are recorded in the audit trail, showing the old value, new value, date and time, and the user who made the change.
Return to BIK Module User Guides
The information provided herein is for informational purposes only. It does not constitute legal, tax, accounting, or other professional advice. It describes functionality and configuration options available within Fourth's solutions and services. The appropriate settings for your organisation will depend on your specific circumstances and requirements, and Customers remain solely responsible for all decisions relating to the configuration and usage of Fourth's solutions and services. The information reflects Fourth's understanding of applicable laws and regulations at the time of publication and may not reflect subsequent changes. Customers should seek independent professional advice regarding their specific compliance requirements.
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