Salary sacrifice is a formal agreement to reduce your cash pay in exchange for a non-cash benefit. HMRC defines it as an agreement to give up an amount of cash pay in return for a non-cash benefit. The point is that tax and National Insurance are charged on your lower salary, so for the right benefit you keep more of what you earn.
How does it save tax and National Insurance?
Your gross salary is contractually reduced, so PAYE tax and employee NI are calculated on the smaller figure. The benefit itself, if it is one of the protected types, is not taxed in its place. You save the tax and 8% NI you would have paid on the sacrificed amount, and your employer saves their 15% NI too, which is why employers often offer these schemes.
Which benefits keep their tax advantage?
After the 2017 optional remuneration (OpRA) rules, only specific benefits keep full tax and NI relief through salary sacrifice:
- Pension contributions paid into a registered scheme
- Employer-arranged pension advice
- Cycle-to-work schemes
- Ultra-low-emission cars (CO2 at or below 75g/km)
- Workplace nursery childcare provision
What about other benefits?
For anything outside the protected list, the OpRA rules tax you on the higher of the salary given up or the normal benefit value, so the saving largely disappears. That is the trade-off: a cycle-to-work bike or extra pension is efficient, but sacrificing salary for a benefit that is taxed at full value rarely is. Check the benefit type before signing up.
How does salary sacrifice show on my payslip?
Usually as a separate deduction line, or as a lower gross salary, depending on how your employer runs it. Either way your taxable pay and NI-able pay fall, which is the whole effect. Watch that a reduced gross does not pull your pay below the National Insurance thresholds in a way that affects qualifying years or statutory pay, which are based on actual earnings.
Primary sources
- Salary sacrifice and the effects on PAYE — gov.uk — How a salary sacrifice affects PAYE tax and NI, and which benefits keep their advantage
- Employment Income Manual EIM42750 — gov.uk — HMRC technical guidance on salary sacrifice arrangements
- Income Tax (Earnings and Pensions) Act 2003 — legislation.gov.uk — ITEPA 2003 — earnings and the optional remuneration (OpRA) rules from FA 2017
- Workplace pensions: what you, your employer and the government pay — gov.uk — Context for pension contributions made by salary sacrifice
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