Salary sacrifice for employers

Find out how to set up salary sacrifice arrangements and calculate tax and National Insurance contributions on them if you're an employer.


A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit.

As an employer, you can set up a salary sacrifice arrangement by changing the terms of your employee’s employment contract. Your employee needs to agree to this change.

A salary sacrifice arrangement must not reduce an employee’s cash earnings below the National Minimum Wage (NMW) rates. Employers must put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.

Change the terms of a salary sacrifice arrangement

If your employee wants to opt in or out of a salary sacrifice arrangement, you must alter their contract with each change. Your employee’s contract must be clear on what their cash and non-cash entitlements are at any given time.

It may be necessary to change the terms of a salary sacrifice arrangement where a lifestyle change significantly alters an employee’s financial circumstances.

This may include:

  • changes to circumstances directly arising as a result of coronavirus (COVID-19)
  • marriage
  • divorce
  • partner becoming redundant or pregnant

Salary sacrifice arrangements can allow opting in or out in the event of lifestyle changes like these.

As a general rule, if an employee swaps between cash earnings and a non-cash benefit whenever they like, any expected tax and National Insurance contributions advantages under a salary sacrifice arrangement will not apply. There are some exceptions to this, Employment Income Manual 42755 gives more information.

Work out the effect on tax and National Insurance contributions

The impact on tax and National Insurance contributions payable for any employee will depend on the pay and non-cash benefits that make up the salary sacrifice arrangement.

You need to pay and deduct the right amount of tax and National Insurance contributions for the cash and benefits you provide.

For the cash component, that means operating the PAYE system correctly through your payroll.

Calculate a non-cash benefit

For any non-cash benefits, you need to work out the value of the benefit.

If you set up a new salary sacrifice arrangement, you’ll need to work out the value of a non-cash benefit by using the higher of the:

For cars with CO2 emissions of no more than 75g/km, you should always use the earnings charge under the normal benefit in kind rules.

Tax and National Insurance contributions exemptions on non-cash benefits

Exemptions on benefits in kind do not apply to salary sacrifice schemes. The only benefits you do not need to value and do not have to report to HMRC for a salary sacrifice arrangement are:

  • payments into pension schemes
  • employer provided pensions advice
  • workplace nurseries
  • childcare vouchers and directly contracted employer provided childcare that started on or before 4 October 2018
  • bicycles and cycling safety equipment (including cycle to work)

Report a non-cash benefit

Reporting requirements for many non-cash benefits are different to those for cash earnings. In general, benefits must be reported to HMRC at the end of the tax year using the end-of-year expenses and benefits online form.

You can also use the payrolling benefits and expenses online service to show you’re collecting tax and benefits through your payroll.

Ask HMRC to confirm the tax and National Insurance contributions

If there is a point of legal uncertainty you can contact the HMRC clearance team. HMRC will not comment on a proposed salary sacrifice arrangement before it has been put in place.

To be satisfied that the change has been effective at the right time and not applied retrospectively, HMRC would need to see:

  • evidence of the variation of terms and conditions (if there is a written contract)
  • payslips before and after the variation

Examples of salary sacrifice

Salary Salary sacrificed Non cash benefit received Consequence
£350 per week £50 of that salary Childcare voucher to the same value (not including new entrants) Only £300 is subject to tax and National Insurance contributions, childcare vouchers are exempt from both tax and Class 1 National Insurance contributions up to a limit of £55 per week
£350 per week £100 of that salary Childcare vouchers to the same value(not including new entrants) £295 is subject to tax and National Insurance contributions - PAYE is operated on the £250 cash component, childcare vouchers are exempt from both tax and Class 1 National Insurance contributions up to a limit of £55 per week, £45 is reported as a non-cash benefit at the end of the tax year using forms P11D
£5,000 bonus £5,000 £5,000 employer contribution to registered pension scheme No employment income tax or National Insurance contributions charge to the employee - the full amount is invested in the pension fund

If an employee starts using Tax-Free Childcare

You must stop giving your employee childcare vouchers with income tax and National Insurance reliefs if they tell you they’ve started using the new Tax-Free Childcare scheme.

If this means stopping or changing a salary sacrifice arrangement, you must also update your employee’s contract and your payroll software.

The Childcare Choices website gives employees more information on support for childcare costs.

Effect of salary sacrifice on payments and benefits

Employers usually decide how earnings related payments such as occupational pension contributions, overtime rates and pay rises are calculated.

Such payments can be based on the notional salary or the new reduced cash salary, but this must be made clear to the employee.

Salary sacrifice can affect an employee’s entitlement to earnings related benefits such as Maternity Allowance and Additional State Pension.

The amount they receive may be less than the full standard rate, or they may lose the entitlement altogether.

Contribution based benefits

Salary sacrifice may affect an employee’s entitlement to contribution based benefits such as Incapacity Benefit and State Pension. It may reduce the cash earnings on which National Insurance contributions are charged.

Employees may therefore pay, or be treated as paying, less or no National Insurance contributions.

Statutory payments

Salary sacrifice can affect the amount of statutory pay an employee receives. It can cause some employees to lose their entitlement altogether.

If a salary sacrifice arrangement reduces an employee’s average weekly earnings below the lower earnings limit, you don’t have to make any statutory payments to them.

Workplace pension schemes

The employer decides whether salary sacrifice affects contributions into a workplace pension scheme.

Often, employers will use a notional level of pay to calculate employer and employee pension contributions, so that employees who participate in salary sacrifice arrangements are not put at a disadvantage.

However, employers should always check with their scheme provider to make sure any such arrangements are allowable. Other salary sacrifice arrangements are possible.

For example, an employer might agree to pay more than the minimum amount required, to cover some or all of the employee’s contribution. The employee may then become entitled to a lower cash salary.


Where an employee has been automatically enrolled into a workplace pension scheme, it will be a registered pension scheme for tax purposes.

No tax is charged on the contributions an employer pays to a registered pension scheme for an employee.

Where an employee opts out of a workplace pension scheme, it is possible that they will have received reduced earnings under the salary sacrifice arrangement.

If the employer ‘makes good’ that shortfall to the employee then the payment should be made subject to tax and National Insurance contributions.

Technical guidance

The following guides contain more detailed information:

Updates to this page

Published 12 June 2014
Last updated 29 July 2021 + show all updates
  1. Removed the section 'Salary sacrifice arrangements set up before 6 April 2017' as the transitional arrangements for calculating the value of the benefit came to an end in April 2021.

  2. Guidance updated to include provision for coronavirus (COVID-19)

  3. Information on Tax free childcare and HMRC clearance team contact details have been updated.

  4. HMRC Clearances Team email address has been updated.

  5. You'll need to calculate the value of a new salary sacrifice arrangement by comparing the value of the benefit and the amount of salary sacrificed. Existing arrangements will be affected by this change in 2018 or 2021, depending on the benefit.

  6. Amendments made to the section headed changing the terms of a salary sacrifice arrangement.

  7. The second entry in the table Examples of salary sacrifice has been amended to correct the explanation of how much of the salary is subject to tax and National Insurance contributions.

  8. Information for employees added to guide.

  9. First published.

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