The Fundamentals
What is salary sacrifice?
It’s a contract change made before the pay is earned: an employee gives up part of their gross cash pay in exchange for a non-cash benefit. PAYE tax and Class 1 NICs are then calculated on the lower cash amount. HMRC classifies these deals as “Optional Remuneration Arrangements” (OpRA). GOV.UK
Which benefits still get the full tax/NIC upside in 2025/26?
HMRC’s “favoured list” is unchanged:
- Employer pension contributions.
- Flexible Life Insurance as a registered scheme.
- Workplace nurseries.
- Bicycles + cycling safety gear (Cycle to Work).
- Ultra‑low‑emission company cars (≤ 75 g/km CO₂) and Electric Cars.
- Financial advice with up to £500 paid from gross salary (must be arranged & paid for by the employer).
Everything else is caught by the OpRA “higher‑of” rule – tax is payable on whichever is greater: the salary forgone or the usual benefit value.
Regulatory trip‑wires to clear up front
|
Item |
2025/26 rule |
Why it matters |
|
National Living Wage floor |
£12.21 per hour (age 21+) from 1 April 2025 |
Sacrifices that push cash pay below this minimum are invalid. You will then be liable to top up an employee’s pay to this minimum level |
|
Employer secondary NIC |
15 % from 6 April 2025 |
Bigger savings on each £ sacrificed—but the same 15 % Class 1A applies to any taxable Benefit‑in‑Kind. |
|
Auto‑enrolment thresholds |
£10k earnings trigger; £6,240–£50,270 qualifying‑earnings band |
A reduced salary may affect an employee’s eligibility for automatic enrollment. |
|
Zero‑emission company car BIK |
3 % (2025/26) ➜ 5 % (2028/29) |
The salary given up usually exceeds the small BIK impact on the employee, so OpRA doesn’t erode the savings. Often, around 80% of the savings are retained. |
Salary Sacrifice Benefit Headlines
- Pensions & Auto‑Enrolment — Salary sacrifice reduces contractual pay; both the £10,000 auto‑enrolment trigger and the qualifying earnings band are calculated on that lower amount. Employees may therefore fall outside auto‑enrolment, and statutory pension funding can diminish unless the employer tops it up to pre‑sacrifice levels.
- Electric Vehicles — BIK is 3% in 2025/26, increasing by one percentage point per year. Build early‑termination insurance into leases so you don’t assume the liability if an employee leaves service.
- Cycle‑to‑Work — The old £1k cap was lifted by the Department of Transport in 2019 if the provider (or you) holds FCA authorisation. If you have FCA authorisation, there is no maximum value limit; however, most operators choose to cap certificates at £5,000- £10,000 for commercial or risk reasons. Still needs 50 %+ business use and an NLW check.
- Workplace Nurseries — Exempt only when the employer finances and manages the nursery. HMRC has been closing “rebadged voucher” schemes since 2024—keep your contracts, invoices, and registration squeaky clean.
Four Pitfalls Of Salary Sacrifice – Zhoosh’s Mini FAQ
1. What happens to pension contributions during maternity or other family leave?
When pension saving is routed through salary sacrifice, the employer must cover the entire qualifying contribution for the duration of statutory maternity, adoption, or shared parental leave.
Suppose an employee gave up 3 % and you paid 5 %. In that case, the paperwork now shows an 8 % employer contribution, and you must keep paying that 8 % on the employee’s pre‑sacrifice salary, not the reduced statutory maternity pay.
The Equality and Human Rights Commission is crystal clear: “You must pay the employer’s pension contribution based upon your employee’s normal contractual rate of pay.” Miss this and you risk breach-of-contract claims and regulatory action; press reports suggest the loss for some mothers could be as high as £4,500 each.
How to steer around it: build the extra cost into your budget models and program payroll so the pension feed auto‑switches to “pre‑sacrifice salary” the moment a protected‑leave flag goes on.
2. Could salary sacrifice shrink an employee’s mortgage offer?
Yes. Most mainstream lenders still run affordability off the post‑sacrifice headline salary, so a chunky exchange can mean a smaller mortgage even when take‑home pay is higher. Consumer‑finance pages now warn that “salary‑sacrifice agreements can affect borrowing capacity for mortgages.”
How to steer around it: urge would‑be buyers to get broker advice first; provide a letter confirming pre‑sacrifice pay if needed, or point them towards lenders willing to “add back” the exchanged amount.
3. What if sacrifice pushes pay below the National Minimum Wage?
Legally, it can’t. From 1 April 2025, the NLW is £12.21 an hour for those aged 21+. Drop below this and HMRC can levy penalties of up to 200 % of the under‑payment (capped at £20k per worker) and “name and shame” the firm. Overtime, fluctuations or apprentice re‑gradings catch out many well‑meaning schemes.
How to steer around it: embed an NLW/RLW check into every salary‑change workflow and run quarterly sweeps to catch drift in variable‑hours teams.
4. Why do some benefits lose their tax edge under the OpRA rules?
Since April 2017, most non-pension perks delivered via salary sacrifice have lost Income Tax and NIC relief. HMRC guidance is unambiguous: benefits under OpRA “no longer benefit from the income‑tax and NICs advantages previously available.”
Casualties include private medical, dental and critical‑illness cover. Employees may see lower gross pay and a year‑end P11D tax bill—a combo that breeds complaints if left unexplained.
How to steer around it: where OpRA bites, collect the benefit‑in‑kind tax through PAYE in real time and show employees their actual net position before they sign.
Salary Sacrifice Implementation Checklist
- Choose providers and run cost‑neutral models (including the employer NIC saving).
- Make it clear – ensure the salary sacrifice is laid out and that employees agree to the deductions.
- Configure payroll – correct deduction codes; apply 15 % Class 1A NIC to taxable BIKs.
- Stress‑test NLW/NMW at onboarding and every pay review.
- Comms blitz – personalised calculators, FAQs, and clear warnings on mortgage and statutory‑pay impacts.
- Annual review – April ushers in new tax bands, NIC rates, BIK tables and sometimes fresh AE thresholds.
Salary sacrifice still delivers powerful wins - especially for pensions - but only when employers understand the obligations and employees see the trade‑offs. Everyday perks, such as shopping vouchers, cinema tickets, or gym memberships, are not tax-privileged under HMRC’s OpRA rules, so any “sacrifice” pitch here is smoke and mirrors; route those through a straight employee-discount platform like Zhoosh instead.
By stress‑testing schemes against maternity scenarios, mortgage underwriting norms, minimum‑wage thresholds and OpRA, you can reap the savings without causing future grievances.
(This article is for general information only and does not constitute regulated financial advice. Employers should seek professional guidance to ensure schemes remain compliant with HMRC rules, employment law and FCA requirements.)
