Salary sacrifice schemes allow UK employees to swap part of their gross salary for a non-cash benefit, often saving income tax and National Insurance for both employee and employer. Following the Optional Remuneration Arrangements (OpRA) rules in 2017, the savings now exist in just a handful of areas — but they are large, and employer pension and electric car schemes have become standard practice across British payrolls.
For employers, salary sacrifice sits at the heart of a modern reward package. Used well, it stretches the value of every pound spent on pay; used carelessly, it creates payroll errors, National Minimum Wage breaches and unhappy employees. This guide is part of our wider payroll and HR hub for UK businesses, and sits alongside our broader accounting resources.
Where the savings still exist
Most salary sacrifice arrangements are caught by OpRA, meaning the benefit is taxed on the higher of the cash given up and the standard cash equivalent. Five categories are explicitly exempt from OpRA, retaining their full tax efficiency.
| Benefit | OpRA-exempt | Why use it |
|---|---|---|
| Pension contributions | Yes | Gross-up + NIC saving |
| Employer-provided pensions advice | Yes | £500 limit |
| Childcare vouchers (closed scheme) | Yes (legacy) | Closed to new entrants |
| Cycle-to-work scheme | Yes | Employee saves tax + NIC |
| Ultra-low emission cars (≤75g/km CO2) | Yes | EV company cars dominate |
For all other salary sacrifice — gym membership, mobile phones, season ticket loans — OpRA usually neutralises the tax saving, leaving only employer NIC efficiency, if anything.
A worked salary sacrifice for pension
Sacrificing £5,000 a year of salary into pension for a higher-rate employee, using illustrative NIC rates of 2% for the employee above the Upper Earnings Limit and 15% for the employer:
| Item | Without sacrifice | With sacrifice |
|---|---|---|
| Gross salary | £80,000 | £75,000 |
| Pension contribution | £5,000 (relief at source) | £5,000 (employer paid) |
| Income tax on £5,000 | £2,000 reclaimed via SA | Saved at source |
| Employee NIC | £100 paid | £100 saved |
| Employer NIC | £750 paid | £750 saved |
| Net employee gain | nil | ~£100 |
| Employer gain | nil | ~£750 |
Many employers share the employer NIC saving with the employee through enhanced pension contributions, doubling the appeal.
Contract and process
Salary sacrifice is a change to the employment contract and must be done properly to be effective for HMRC.
- Issue a variation to contract signed by the employee
- Make the change prospective, never retrospective
- Avoid sacrifice that drops pay below the National Minimum Wage
- Set a clear lock-in period (commonly 12 months) and lifestyle event exits
- Reflect the lower notional salary in mortgage references and SMP averaging (warn the employee)
- Run the change through payroll with the correct OpRA flag
Risks and admin
The biggest risks are accidentally breaching NMW and overlooking the impact on pensionable salary, statutory pay averaging and redundancy pay. A clear FAQ for employees prevents most queries.
Final thoughts
Salary sacrifice is set up in your payroll software; the bookkeeping is a payroll journal. For help with the set-up, ask for accounting help.