HMRC salary sacrifice schemes are becoming increasingly invaluable for companies wanting to optimise their employee benefit packages while also managing costs. At their core, salary sacrifice schemes – also known as a salary exchange – offer a way for employers and employees to save money. They’re designed to help everyone make tax-efficient benefit choices that are easy to understand and use.
Table of contents
Time strapped? Get the key takeaways from the blog:
- What is it? Salary sacrifice allows employees to exchange part of their gross salary for non-cash benefits, reducing both employer and employee tax and National Insurance contributions
- The impact: An employee earning £40,000 per year who sacrifices £2,000 annually into their pension saves their employer £300 annually in NI, while also saving £160 annually themselves
- Beyond pensions: Salary sacrifice benefits extend beyond pensions to include nursery fees, electric vehicles, cycle-to-work schemes, and technology purchases
- Support diverse employee needs: From early-career professionals to parents and those planning for retirement, salary sacrifice benefits can be tailored to different life stages
- Maximise your salary sacrifice schemes: Maji’s platform streamlines benefit access, allowing employees to manage salary sacrifice benefits, financial coaching, and real-time analytics all through a single dashboard
Introduction to salary sacrifice
Salary sacrifice allows employees to exchange part of their gross salary for non-cash benefits, reducing both employer and employee tax and National Insurance contributions.
Done well, a salary exchange has immense value, but many people don’t really understand how they work. In this article, we will break down everything you need to know about salary sacrifice—the key figures, common misconceptions, and answers to frequently asked questions. We’ve got all the details covered for you.
The mechanics of salary sacrifice
The concept of salary sacrifice is straightforward. Employees agree to access or receive a benefit in exchange for a reduction in their gross salary (this is their salary before tax or national insurance). It’s a more tax efficient way of employees accessing benefits they want. These non-cash benefits include options like pension contributions, childcare fees, electric vehicles, and cycle to work benefits.
A salary sacrifice scenario benefits both employers and employees:
- Employers: Reduce National Insurance contributions with the potential to reinvest savings into employee benefits or business growth
- Employees: Take-home pay is greater each month, as they are being taxed on a smaller portion of their overall salary
Let’s break it down with a working example
Let’s look at an example considering a pension salary sacrifice arrangement.
If your employee has a £40,000 total salary, and they opt into a salary exchange, they are taxed differently, meaning they take home more pay than someone not in a salary exchange.
Let’s assume an NI rate of 15% (as per the budget announcement in 2024), and standard pension contributions of 8% apply (5% for the employee and 3% for the employer).
For the employee:
For the employer:
- For a pension contribution of £2,000, the employer saves £300
- If the employee increased their pension contributions to £3,500, the employer would save £525
To summarise:
- The employee receives the full amount of their chosen contribution in their pension
- The employee saves on their own NI contributions
- Employers save on NI costs for each employee participating in the scheme
Different salary exchange options you can offer
Your employees don’t have to only sacrifice into their pension. There are a range of different types of salary sacrifice benefits including:
- Workplace nurseries
- Cycle to work
- Electric car scheme
- Technology salary sacrifice
✔ Click here to get a detailed view of each of the salary exchanges schemes Maji offers
Remembering compliance
To implement salary exchange schemes, there are several things you need to know so you remain compliant with regulations:
- Ensure your employees are eligible and the sacrificed salary doesn’t take the salary below the National Minimum Wage as you can be fined up to £20,000 per employee and be banned from company directorship for up to 15 years
- Remember the Lower Earnings Limit where if employees don’t meet the threshold over a number of years they may miss out on their State Pension when they retire
- Educate your employees as this is a statutory requirement to ensure they understand what it means and how it works
- Manage opt-ins or opt-outs and keep careful records of employee consent to changes and make them available to HMRC if required
- Update contracts to reflect your salary exchange levels and salaries, because salary exchange counts as a change to the remuneration package for each employee
Common pitfalls for salary exchanges
When introducing salary exchange schemes, businesses often encounter these four key challenges:
- Impact on company culture: If not communicated effectively, salary exchange can lead to confusion rather than fostering a sense of unity among employees. Misunderstandings about how take-home pay is affected may cause concern and lead to employees not opting into these schemes
- HR preparedness: Employees will have questions about how salary exchange impacts their pay, benefits, and taxes. If HR teams aren’t equipped with clear answers, employees may feel unsupported, leading to lower engagement and trust
- Legal and compliance risks: Employers sometimes underestimate the legal and compliance requirements tied to salary exchange, such as employment contract amendments and HMRC regulations. Failing to address these properly can create financial and reputational risks
- Lack of employee education: Without clear, ongoing education, employees may not fully understand the benefits of salary exchange. This can lead to low participation rates, reducing the scheme’s overall effectiveness and financial returns for both employees and the business
The most popular questions answered
Salary sacrifice can sometimes be a bit complex, with certain aspects often misunderstood or seeming overwhelming. To help clarify things, our resident Salary Sacrifice expert, Megan has compiled the most common questions we receive from employers and detailed the facts for you.
Relating to your organisation:
1. Do salary sacrifice schemes come with an administration burden for my HR/payroll team?
Salary sacrifice schemes require some administration, but a well-managed system can minimise the burden. Employers must ensure payroll processes salary reductions correctly, contracts reflect scheme participation, and employees do not fall below the National Minimum Wage. Compliance with HMRC rules and managing lifestyle change requests also require attention. However, a good third-party provider, such as Maji, can streamline this by handling participation logs, tracking changes, and providing reports for compliance and payroll accuracy, reducing manual workload for HR and payroll teams.
2. Which salary sacrifice schemes are taxable?
Salary sacrifice schemes fall into two categories: exempt and non-exempt.
Exempt schemes: These benefits are not subject to tax or National Insurance (NI) contributions. These include:
- Employer pension contributions
- Workplace nursery fees
- Cycle-to-work schemes
- Payroll giving
Taxable (non-exempt) schemes: These benefits are considered ‘Benefits in kind’, effectively a non cash benefit that counts as taxable income. Therefore they are subject to income tax paid by the employee at the normal rate. Employers also pay NI on these as normal. However, employees are exempt from paying NI on these benefits, conferring an advantage for staff.
Examples include:
- Technology schemes
- Car maintenance
- Travel and leisure
- Travel card
Special exemptions: Leasing an electric car is effectively exempt because the government has set the BIK tax rate at 3% (2025/2026 tax year). However, BIK is set to increase slowly over the next few years to 9% in 2030.
3. How are taxable salary sacrifice benefits reported?
Employers must report taxable salary sacrifice benefits to HMRC, typically via payrolling or a P11D form at the end of the tax year.
To ensure compliance, employers should check HMRC guidelines and use payroll software or third-party providers for accurate reporting.
Failure to report taxable benefits correctly can result in penalties, backdated tax bills, and additional National Insurance charges, so staying compliant is essential.
4. How do I ensure we adhere to the compliance around the National Minimum Wage?
To comply with HMRC regulations, employers must ensure that salary sacrifice arrangements do not reduce an employee’s earnings below the National Minimum Wage (NMW). This means regularly reviewing payroll data to confirm that deductions for salary sacrifice do not breach the legal pay threshold.
To stay compliant, employers should conduct annual checks and review salary levels when employees opt in or adjust their contributions. A good third-party provider can assist with these checks, providing reports and alerts to help prevent non-compliance. Ensuring payroll systems are set up to flag potential NMW breaches before processing salary sacrifice deductions is also essential.
5. What happens to salary sacrifice arrangements during parental leave?
During parental leave, employers are generally required to continue providing non-cash benefits, such as pension contributions under salary sacrifice arrangements, to ensure employees do not lose out on these benefits during their leave.
6. Is childcare salary sacrifice legitimate?
The Workplace Nursery Scheme, often referred to as Childcare Salary Sacrifice, can be a legitimate and tax-efficient way for employers to provide childcare support to their employees. However, it’s crucial to understand and comply with specific HMRC regulations to ensure the scheme qualifies for tax exemptions.
If you are considering a workplace nursery scheme, it’s important you:
- Thoroughly Review HMRC Guidelines: Ensure your workplace nursery arrangements align with HMRC’s requirements.
- Engage with Reputable Providers: Partner with childcare providers who are well-versed in HMRC regulations and can assist in maintaining compliance.
- Maintain Detailed Documentation: Keep comprehensive records of financial contributions and management involvement to demonstrate compliance if required.
7. Is grocery salary sacrifice legitimate?
This scheme has not been approved by HMRC, and many experts believe it does not align with the spirit of salary sacrifice regulations. Offering it could lead to employers facing tax liabilities, fines, and reputational damage.
The operational costs and administrative burdens of implementing grocery salary sacrifice outweigh the small savings it offers employees (typically 2-3% more than standard shopping discounts). Given the risks and complexity, employers may be better off choosing high-quality shopping discount schemes that do not carry risk and are easier to administer.
Relating to your employees:
1. How do I know if we have salary sacrifice on our pension?
To find out if you have salary sacrifice on your pension, check a payslip or speak with your payroll department.
If you are running a salary sacrifice scheme, you should see two tell tale signs:
- On payroll, for the pension, you as the employer should be contributing the full pension amount. So if you pay 3% and employees pay 5%, you should see your employer contribution totalling 8%
- On a payslip, the employee pension contribution or other salary sacrifice benefit should appear as a pre tax dedication rather than a post tax payment
Your HR or payroll team should be able to confirm if you’re enrolled in a salary sacrifice pension scheme and explain the specific details.
2. How does salary sacrifice impact lower-paid employees? (including considerations for those above NMW but still on lower earnings)
As an employer, there are three main considerations:
- National Minimum Wage compliance: You can’t use salary sacrifice for staff if their pay drops below national minimum wage levels. In the case of lower paid workers, employers have two options: stop using salary sacrifice for lower paid staff, or to increase pay so that even after sacrifice staff are not below whichever minimum pay level applies to them
- Lower Earnings Limit impacts: If employees earn less than the Lower Earnings Limit, they can miss out on a range of statutory benefits such as qualifying state pension years. Be careful to ensure this doesn’t happen to your staff
- Tax relief v NI relief: Employees on low salaries who are on a pension relief at source arrangement benefit from tax relief on their pension contributions, even if they don’t earn enough to pay tax. Salary sacrifice moves employees to a net pay arrangement. Be careful that you are not trading away a better financial situation for staff by enrolling them in salary sacrifice
If introducing salary sacrifice into a company where there are lower paid workers who can’t benefit, we suggest offering alternative money saving benefits such as shopping discounts. This ensures all employees have something they can access to make a tangible difference to their financial wellbeing.
3. Does salary sacrifice affect an employee’s mortgage application?
The short answer is almost always no. Most lenders will assess mortgage applications by conducting an affordability assessment. These vary as to whether they take gross pay (before deductions and tax), net pay (after deductions and tax) or take-home pay. If an affordability assessment is done on gross pay, salary sacrifice wont make any difference. If done on take-home pay, a salary sacrifice can boost numbers so may positively affect the outcome of an affordability assessment.
As salary sacrifice is such a common way for people to take benefits, most lenders are aware of this and do not count it against an application.
If there is a lender that does count it and/or works on the net pay salary, there are simple ways around it such as the employer writing a letter on behalf of the employee to the mortgage company to explain the gross salary position, or the employee just opting out of the salary sacrifice scheme (depending on the terms and conditions of the scheme).
4. Can employees opt in and out of salary sacrifice at any time?
Generally speaking, salary sacrifice schemes are voluntary and there is no minimum term mandated by HMRC.
For benefits where there is no upfront employer liability, such as pension contributions, it is common for employees to be able to opt in or out at any time.
However, for benefits where there is an up front employer liability such as the leasing of electric cars, there is often a minimum term such as 12 months.
An employee’s contract must reflect the value of both their cash and non-cash entitlements at any given time. If an employee wishes to opt in or out of a salary sacrifice scheme, their contract must be amended to reflect each change.
5. What happens to a salary sacrifice arrangement if an employee leaves the company?
If an employee leaves the company, their salary sacrifice arrangement generally ends on their final working day. Any benefits received through salary sacrifice (such as pension contributions or other non-cash benefits) will stop unless there is a contractual agreement stating otherwise.
Where the employer has made an upfront purchase of a good such as a lease for an electric car, there can be ongoing liability for paying off that benefit over the original term. Employers should consider ways to mitigate this liability when they are looking to set up salary sacrifice schemes.
Employers should ensure that final payroll calculations reflect the end of the salary sacrifice arrangement and comply with HMRC guidelines.
Choosing the right salary sacrifice approach
The most successful salary sacrifice schemes start with understanding what your people need, and what their biggest challenges are. Different employee segments will value different benefits. Some may prioritise childcare benefits or technology purchases, while others may focus on pensions or electric vehicle schemes.
When considering a salary sacrifice implementation for your workforce, here are several key considerations:
- Financial education is important here. Without proper guidance, people can underuse available benefits or make choices that don’t optimise their financial position
- Personalisation matters. Each employee comes with a unique financial situation. Higher rate tax payers may have complex questions about tax optimisation. Lower earners may want to understand more about the marginal gain of salary sacrifice or how it might affect statutory payments. It’s important to provide a mechanism for employees to talk through how changes may positively or negatively affect them, so that all the hard work you do is appreciated, understood and delivers value
- Efficiency makes a difference. There are different ways to implement and manage salary sacrifice schemes. You want to find a method that minimises your admin but maximises value
- Pension coaching can change lives. With 91% of private sector employees enrolled into a pension, pension salary sacrifice is the most common salary sacrifice scheme that supports the largest number of employees. With employees facing increased anxiety about their financial futures, providing coaching to help people save more and optimise their pension savings can reduce stress and improve employee loyalty
✔ See how Maji supports your organisations’ best interest with a free product demo
Making salary sacrifice work for you
Maji’s platform makes implementing and managing salary sacrifice schemes simple and impactful. Our solution includes:
- Pre-Vetted, Trusted Providers – We’ve done the research for you. Our platform gives you access to carefully selected, high-quality salary sacrifice schemes, saving you time and ensuring compliance
- Expert employer support – A dedicated account manager guides you through setup and ongoing management, providing specialist salary sacrifice expertise and live chat support whenever you need it
- Employee support services – Employees can access a dedicated chat service to ask questions and receive clear, timely answers, helping them understand and maximise their benefits
- Financial wellbeing tools and insights – Maji’s platform provides best in class tools and digital guidance to help employees understand their salary sacrifice schemes, run personalised calculations, and feel confident and in control of their money
- Employees have one place to access all their benefits – Employees can view and manage their salary sacrifice benefits in one place, ensuring a seamless and engaging experience
- 1-1 financial coaching – Our financial coaches are qualified financial advisors, providing employees with personalised practical support on the financial topics that matter to them, including tax optimisation, pension savings strategies, and how to make the most of their salary sacrifice savings, including investment options and pension consolidation guidance
- Quick implementation – Maji’s technology ensures a smooth, hassle-free setup, so you can start reaping the benefits of salary sacrifice in no time
The success of a salary sacrifice scheme isn’t just in its implementation but how it grows and evolves with your people. If you invest in a well-rounded approach to financial wellbeing that prioritises your employees and your business, you are building a powerful platform that promotes financial security for everyone.
Think Money. Think Maji.
