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HMRC internal manual

National Insurance Manual

Class 1 NICs: earnings of employees and office holders: salary sacrifices

Traditional salary sacrifice arrangements

‘Salary sacrifices’ have been a feature associated with pension schemes for many years. The employee agrees with their employer to take a cut in earnings and the employer agrees to contribute that amount as premiums to a pension fund. No NICs liability arises if the employee enters into a formal agreement with the employer to give up their right to that part of their earnings and to vary their terms and conditions of employment accordingly.

Recent developments

Although in the past the main use of salary sacrifices related to the giving up of rights to cash remuneration in return for contributions to pension schemes, the position has now changed. Such arrangements now apply to a variety of situations where an employee gives up a right to future cash remuneration in return for a payment in kind.


An employee is entitled to an annual salary of £35,000.

They agree to a salary sacrifice to move in the future to an annual remuneration package comprised of £33,000 cash and £2,000 in vouchers which can be exchanged for childcare.

The childcare vouchers would not normally attract a liability for NICs where all of the relevant conditions for receipt were met as they are - depending upon when the employee first obtained them and their personal taxable position - specifically excluded by regulation.

NICs will be due only on the £33,000 cash.

(See NIM02445 for information about the exemption in respect of childcare vouchers and NIM16110 for information about the exemption for provided childcare.)

For a salary sacrifice to be successful:

  • the future remuneration must be given up before it is treated as received for NICs purposes
  • the revised contractual arrangement between the employee and the employer must be to the effect that the employee is entitled to a lower cash remuneration and a benefit

See EIM42750 to EIM42790 for detailed guidance regarding salary sacrifice arrangements. The EIM also covers optional remuneration arrangements (OpRA), which include salary sacrifice, EIM44000.  

General guidance in respect of salary sacrifice arrangements has been published on the HMRC website.

You should consider issuing a copy of that guidance to any employer or employee who enquires about salary sacrifice.

A list of Frequently Asked Questions is also maintained on the website. The link below will take you to the relevant pages. 

The Heaton v Bell principle

The guidance at EIM42755 explains the principle established in the case of Heaton v Bell. Basically, this case gave rise to the principle that if an employee can give up a benefit at any time and revert to the original higher cash remuneration then the benefit is taxable under section 62 ITEPA because it can be converted into money.

This principle has no relevance for NICs. When considering NICs liability you must always have regard to what the employee actually receives and assess liability for NICs accordingly. This means that if an employee:

  • receives cash or a payment in kind which attracts a Class 1 NICs liability (for example, gemstones) then a Class 1 liability will arise
  • is provided with a payment in kind which is subject to a Class 1A NICs liability (for example, private health insurance cover) then the liability will be for Class 1A NICs.

The Smart Pensions Scheme

We’ve recently become aware of a new scheme (the Smart Pensions Scheme) which involves the employee in giving up cash remuneration in return for the employer taking over responsibility for making the contributions to the pension scheme which were originally made by the employee. See NIM02331 for more information about this scheme.