Salary sacrifice: a guide for all employers
Salary sacrifice is a contractual arrangement where an employee agrees to reduce their cash salary in exchange for non-cash benefits. This can reduce Income Tax and National Insurance (NI), but only for certain qualifying benefits.
Applies to all employers
Salary sacrifice is available to all types of employers, including:
- Private businesses
- Charities
- Not-for-profits
- Social enterprises
Regardless of your organisation’s structure, the arrangement must follow HMRC guidance and employment law.
Qualifying benefits with green and ethical impact
Tax and NI savings are only available for:
- Employer pension contributions
Supports long-term financial wellbeing and can be directed into ethical investment funds, aligning retirement savings with environmental or social values. - Pension advice
Helps employees make informed decisions about their future, and can include guidance on sustainable investment options. - Workplace nurseries
Promotes family-friendly employment and supports early years education, contributing to social equity and employee retention. - Childcare vouchers (pre-October 2018)
Encourages workforce participation among parents and supports affordable childcare, especially valuable in lower-income households. - Cycle to Work schemes
Reduces carbon emissions, promotes active travel, and improves employee health—an excellent fit for organisations with sustainability goals. - Workplace car parking
Can be integrated with green transport initiatives, such as electric vehicle charging, carpooling, or prioritising low-emission vehicles.
Key requirements
- Contracts must be updated to reflect changes.
- Salary must not fall below the National Minimum Wage.
- Employees may only opt out at scheme a after a lifestyle change. 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.
- Salary sacrifice may affect statutory benefits like maternity pay and state pension eligibility.
Tax and NI treatment
For most benefits, the taxable value is the higher of:
- The salary given up
- The benefit-in-kind value
Commuting costs (e.g. train passes) do not qualify for savings and are treated as taxable earnings.
Loans to employees
Interest-free or low-interest loans (up to £10,000) are tax/NI-free only on the interest, not the loan itself. These must be repaid from net pay and should be carefully considered by directors.
Final thoughts
Salary sacrifice remains a valuable tool for offering ethical and sustainable benefits, especially pensions and cycle schemes. It’s important to ensure arrangements are legally sound, clearly documented, and compliant with HMRC guidance.
