Salary sacrifice schemes for employers: Setup, tax rules & employee benefits

Published 10 March 2026

Table of contents

• What is salary sacrifice?
• How does salary sacrifice work for employers?
• How tax and national insurance rules apply
• Which benefits qualify for salary sacrifice?
• How to set up a salary sacrifice scheme
• Get started with salary sacrifice in Xero
• FAQs on salary sacrifice for employers

Key takeaways

• Salary sacrifice swaps contractual pay for a non‑cash benefit. It can reduce National Insurance Contributions (NICs) or income tax for you and your team.
• You can offer lots of benefits through a salary sacrifice scheme, but employees' cash payments must stay above the national minimum wage.
• Pensions, cycle to work, and daycare vouchers or on-site facilities are typically exempt from NICs when offered through a salary sacrifice scheme, but may be capped.
• To meet HM Revenue and Customs rules, put clear agreements in place, get employee consent, and set up payroll correctly.

What is salary sacrifice?

Salary sacrifice is when an employee accepts a non-cash benefit in lieu of cash pay, such as childcare vouchers, payments into pension schemes, mobile phones, gym memberships, and company cars.

Employees must agree to opt in to salary sacrifice schemes, and they may face lower tax or National Insurance Contributions (NICs) depending on the type of benefit and its value.

HMRC has more details on salary sacrifice for employers.

How does salary sacrifice work for employers?

Employers decide which salary sacrifice benefits they want to offer their employees. Although employees can then opt in to the programme they want, they can only opt out and back in if they're experiencing significant lifestyle changes (like marriage, divorce, or a new child).

Employees should review the salary sacrifice rules carefully to determine how various non-cash benefits affect taxes and reporting requirements. Some benefits are exempt, while employers must report others to HMRC at the end of the year.

How tax and national insurance rules apply

The tax and NIC requirements vary based on the type of benefit. The following salary sacrifice benefits are exempt from NIC and tax:

• payments into pension schemes (exemption capped at £2000 as of April 2029)
• employer-provided pension advice
• cycle to work schemes, or other bicycle or cycling safety equipment
• workplace nurseries
• childcare vouchers up to £55 per week

You must report the value of most other benefits to HMRC and pay tax just as you would on cash payments. For example, if you offer a salary sacrifice car scheme, report the higher of the salary sacrificed or the value of the benefit.

There are a few exceptions: as of 2026, employees can use pre-tax income on electric car salary sacrifice programmes. Employers may need to report the cost of letting employees charge their own EVs, but don't have to report or pay NICs on charging business-owned EVs.

To look at the rules for specific benefits, check out the HMRC's list of employee expenses and benefits.

Which benefits qualify for salary sacrifice?

You can include dozens of different benefits in a salary sacrifice scheme, including wellness benefits, accommodations, vehicles, school fees, and more. Only certain benefits are exempt from NIC or paid with pre-tax income.

How to set up a salary sacrifice scheme

Before putting a scheme in place, it’s a good idea to talk to a specialist about the tax benefits and costs for your business of putting salary sacrifice in place.

Here's an overview of the steps:

1. Choose benefits that qualify for salary sacrifice

Decide which benefits you'd like to offer through your salary sacrifice scheme. Consider things like the cost, tax benefits, effects on employee attraction and retention. The most popular benefits tend to those not subject to national insurance, like salary sacrifice pension programmes, on-site nurseries or childcare vouchers, and cycle to work schemes.

Although tax benefits vary, you may also want to offer non-cash benefits like car parking, mobile phones, gym memberships, or school fees. You can even offer accommodation through salary sacrifice if that makes sense for your business.

2. Check eligibility and minimum wage

Review eligibility requirements to clarify which employees can participate in the salary sacrifice programme. Employees may need to be over 21 and have worked for your company for at least 6 months. Also, the salary sacrifice cannot drop their cash payments below minimum wage.

3. Model savings with a salary sacrifice calculator

Use a salary sacrifice calculator to estimate the cost and tax savings of the benefits you want to offer. Then compare the potential savings to other government programmes, such as the small business employment allowance (which helps qualifying small businesses reduce their NICs).

Talk with a benefit administrator or accountant to work out the numbers for your situation.

4. Update contracts and get employee consent

Update employee contracts to incorporate the salary sacrifice programme. Clearly define when and how employees can opt in and out of the programme.

Although the government lists life events that would allow employees to opt in or out of the programme, (like marriage, divorce, and so on) it does not strictly define qualifying events. You'll therefore need to figure out what works for your business and include a list in your employee manuals or contracts.

5. Configure payroll and pensions

Set up payroll to include the new benefits.

• Reduce gross pay based on the value of the benefits.
• Review the tax implications of each benefit carefully.
• Exclude exempted benefits, and calculate tax and NIC based on cash payments and non-exempt non-cash benefits.

6. Run RTI and keep records

Run Real Time Information (RTI) PAYE reports as usual on or before payday, using HMRC-approved payroll software. If you haven’t registered to payroll benefits, report taxable non-cash benefits at the end of the tax year using HMRC’s online services (for example, form P11D). If you payroll benefits, include the taxable value through payroll during the year. Employees pay income tax on the value of those benefits through PAYE when you run payroll.

Check out HMRC's guides to reporting expenses and benefits through payroll.

Get started with salary sacrifice in Xero

Staying on top of payroll and salary sacrifice is easy with Xero.

Xero's comprehensive payroll features automatically calculate your employees’ pay, salary advances, taxes, NIC, and benefits. It can even automate claims for Small Employer Relief (SER) on statutory payments. Once you’re done, just file payroll reports with a few clicks.

Xero small business accounting software offers everything you need to track the numbers for your business. It integrates with a range of apps to meet all your business's needs, and can help you with everything from employee benefits to VAT calculations and annual tax reports.

Get one month free

FAQs on salary sacrifice for employers

Check out these FAQs to learn more about salary sacrifice:

Does salary sacrifice affect minimum wage?

No – salary sacrifice benefits cannot reduce an employee's pay below minimum wage. Employers should put safeguards in place to ensure deductions don't reduce pay below this level.

Can directors use salary sacrifice?

Yes – because company directors are considered to be employees of the company, they can opt in to salary sacrifice pensions or other benefits. Salary sacrifice can reduce NIC and income tax, but directors are subject to the same employer salary sacrifice rules as other employees.

How does salary sacrifice affect statutory pay?

Salary sacrifice directly affects statutory pay by reducing cash benefits. Some employees will be eligible for lower statutory payments when dealing with life events, such as adoption, childbirth, illness, or bereavement, while others may lose their right to statutory payments altogether.

Can staff change or opt out mid-year?

Yes, but only if they're experiencing a qualifying life event or their employer is offering open enrolment into the scheme. Employers can lose tax benefits if they let employees opt in and out of salary sacrifice schemes whenever they like. But most employers let employees freely opt in to benefits programmes during a set annual period.

What changes are proposed, and what should I do?

The salary sacrifice rules UK employers must follow for pension contributions are set to change.

• As of April 2029, the pension contributions exempt from NIC will be capped at £2000.
• Employee contributions over that amount will still be exempt from income tax, and all employer pension contributions will continue to be exempt from NIC.

HMRC reports that these changes will not affect most employers (they will mainly affect high-income earners.

Learn more about the changes from the HMRC.

What is a SMART salary sacrifice?

Short for Save More and Reduce Tax, SMART is just another name for salary sacrifice. SMART schemes let employees receive non-cash benefits instead of cash payments – most significantly pension contributions, which reduce NIC and tax. If handled correctly, SMART schemes can boost pensions without greatly reducing take-home pay.