Salary sacrifice for employers

Find out how to set up a salary sacrifice arrangement and calculate tax and National Insurance contributions on them.


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 can’t reduce an employee’s cash earnings below the National Minimum Wage rates.

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 marriage, divorce, or an employee’s spouse or 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 can swap between cash earnings and a non-cash benefit whenever they like, any expected tax and National Insurance contributions (NICs) advantages under a salary sacrifice arrangement won’t apply. There are some exceptions, please read Employment Income Manual 42755 for more information.

Work out the effect on tax and NICs

The impact on tax and NICs 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 NICs 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 calculate the value of the benefit.

From 6 April 2017, 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:

However, 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 NICs exemptions on non-cash benefits

Exemptions on benefits in kind don’t apply to salary sacrifice schemes. The only benefits that you don’t need to value for a salary sacrifice arrangement, as you don’t have to report them to HMRC, are:

  • payments into pension schemes
  • employer provided pensions advice
  • childcare vouchers, workplace nurseries and directly contracted employer provided childcare
  • bicycles and cycling safety equipment (including cycle to work)

Salary sacrifice arrangements set up before 6 April 2017

If you set up a salary sacrifice arrangement with an employee before 6 April 2017, you can continue to calculate the value of the benefit as you did before. This only relates to specific arrangements with an employee, not to your overall salary sacrifice policy.

The arrangement will be subject to new rules if the arrangement is varied, renewed or modified unless the change is:

  • connected to an employee’s statutory sick pay
  • connected to an employee’s maternity, paternity, adoption or shared parental pay
  • out of the control of the employee and employer (like a damaged contract)

Most existing arrangements set up before 6 April 2017 will automatically be subject to the new rules from 6 April 2018. However, arrangements will not be subject to the new rules until 6 April 2021 unless they are varied, renewed or modified if they are for:

  • cars with CO2 emissions of more than 75g/km
  • accommodation
  • school fees (even if varied, renewed or modified as long as the arrangement relates to the same child and school)

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 HM Revenue and Customs (HMRC) at the end of the tax year using the end-of-year expenses and benefits online form.

Ask HMRC to confirm the tax and NICs

Once a salary sacrifice arrangement is in place, employers can ask the HMRC Clearances Team to confirm the tax and NICs implications. HMRC won’t comment on a proposed salary sacrifice arrangement before it has been put in place.

HMRC Clearances Team
Alexander House
21 Victoria Avenue
SS99 1BD

Alternatively they can email the HMRC Clearances Team at

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 Only £300 is subject to tax and NICs, childcare vouchers are exempt from both tax and Class 1 NICs up to a limit of £55 per week
£350 per week £100 of that salary Childcare vouchers to the same value £295 is subject to tax and NICs - PAYE is operated on the £250 cash component, childcare vouchers are exempt from both tax and Class 1 NICs 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 or P9D
£5,000 bonus £5,000 £5,000 employer contribution to registered pension scheme No employment income tax or NICs charge to the employee - the full amount is invested in the pension fund

Childcare vouchers and tax credits

Childcare vouchers from an employer may affect the amount of tax credits an employee gets. Employees can use a calculator to help them decide if they’re better off taking the vouchers or not.

Effect of salary sacrifice on payments and benefits

Employers usually decide how earnings related payments such as occupational pension contributions, overtime rates, pay rises, etc 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. Salary sacrifice may reduce the cash earnings on which NICs are charged. Employees may therefore pay – or be treated as paying – less or no NICs.

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, then the employer doesn’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 in respect of 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 NICs.

Technical guidance

The following guides contain more detailed information:

Published 12 June 2014
Last updated 31 August 2017 + show all updates
  1. 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.
  2. Amendments made to the section headed changing the terms of a salary sacrifice arrangement.
  3. 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.
  4. Information for employees added to guide.
  5. First published.