Salary sacrifice: a guide for employers

Salary sacrifice is one of the few arrangements that leaves both the employer and the employee better off, using rules HMRC explicitly allows. It is also about to change — which makes the next couple of years unusually important for any business thinking about it.

This is a plain guide to how it works, what it saves, and what to get right before you start.

What salary sacrifice actually is

An employee agrees to give up part of their gross salary. In exchange, the employer provides a non-cash benefit of the same value — most commonly, paying that amount straight into the employee’s pension.

Because the money never becomes salary, it is not subject to income tax or National Insurance. The employee’s take-home pay barely moves, the pension contribution is larger, or the employer’s costs are lower. Often some combination of the three.

HMRC describes it as an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit. That wording matters: it is a change to the employment contract, not a payroll setting.

What it saves, and who keeps it

There are two separate savings and it helps to keep them apart.

• The employer saves Class 1 employer National Insurance on the sacrificed amount — charged at 15% for 2026/27.
• The employee saves income tax at their marginal rate, plus employee National Insurance at 8% within the main band and 2% above it.

What happens to that saving is a decision, and there are four honest options:

• The employee takes it as higher take-home pay
• The employee puts it into the pension, and their take-home stays as it was
• The employer keeps it, reducing employment costs
• The employer adds it to the pension, increasing the contribution at no extra cost

Most schemes pick one and apply it consistently. Deciding which before you consult staff saves a great deal of confusion later.

What changes in April 2029

This is the part missing from most guides, and it is the reason to look at this now rather than in a couple of years.

At the Budget in November 2025 the government announced that from 6 April 2029 the National Insurance exemption on salary-sacrificed pension contributions will be capped at £2,000 a year per employee. Anything sacrificed above that will be treated like an ordinary pension contribution and will attract both employee and employer National Insurance.

Three things follow, and they are not the obvious ones.

• It is a cap, not an abolition. The first £2,000 keeps its full advantage. For a good number of employees nothing changes at all.
• It limits the National Insurance treatment only. Pension contributions themselves are not capped by this. You can still pay in at the same levels, subject to the annual allowance as usual.
• There are around two and a half years of the current rules left. For a business running larger sacrifices, every month without a scheme is a saving that does not come back.

The change is still being legislated, so the detail can move. It is worth reviewing rather than assuming.

Which benefits can be sacrificed

The list is shorter than most people expect, and it has shrunk.

Still available and exempt:

• Pension contributions — by far the most used, and the reason most schemes exist
• Employer-arranged pension advice
• Workplace nurseries
• Cycles and cycling safety equipment

Closed to new entrants:

• Childcare vouchers closed on 4 October 2018. Employees already in a scheme on that date may be able to continue, but nobody new can be put into one. Tax-Free Childcare replaced it.

Most other benefits lost their advantage under the 2017 rules, which value the benefit as the higher of the salary given up or the normal benefit-in-kind charge. That usually removes the point of doing it.

What to get right before you start

It is a contract change

Salary sacrifice reduces contractual pay, so it needs employee agreement and a proper consultation period. Payroll cannot simply switch it on.

It must not take anyone below the National Minimum Wage

HMRC is explicit that a sacrifice cannot reduce cash earnings below NMW rates, and the responsibility for making sure it does not sits with the employer. In practice that rules out lower-paid staff, or requires a cap on what they can sacrifice.

Some employees are worse off, and they should be told

• Mortgage borrowing. Lenders assess on gross salary, and salary sacrifice reduces it. For anyone about to buy or remortgage, this matters more than the tax saving does.
• Statutory payments. If average weekly earnings fall below the lower earnings limit, entitlement to statutory maternity, paternity and sick pay can be reduced or lost.
• State Pension and contributory benefits can be affected for the same reason.

For some employees the effect runs the other way. A lower gross salary can restore entitlement to means-tested benefits, or recover part of a tapered personal allowance. It is worth modelling rather than assuming.

Document it properly

A written variation to the contract, the payroll change, and a clear record of what each employee agreed to.

Is it worth doing?

For most businesses with employees earning comfortably above minimum wage, yes — and more so before April 2029 than after. The saving is real, the rules are settled, and it is one of the few staff benefits that costs the employer nothing to give.

The two things that go wrong are both avoidable: introducing it without consulting staff properly, and putting somebody into it who was about to apply for a mortgage.

What to do next

Setting up salary sacrifice touches employment contracts, payroll and pensions at the same time, which is why it usually needs your accountant and a financial adviser in the same conversation. We are happy to be one half of that.

We are an independent, whole-of-market firm based at Glasgow Harbour, working with employers across Glasgow and the west of Scotland.