Salary Sacrifice: A Guide for Employers 2026/27

Salary sacrifice is one of the most tax-efficient ways for employers to structure employee benefits. When set up correctly it saves money for both the employer and the employee. This guide explains how salary sacrifice works, which benefits qualify, what the rules are for 2026/27, and what is changing in the years ahead.

What Is Salary Sacrifice?

A salary sacrifice arrangement is an agreement to reduce an employee's entitlement to cash pay, usually in return for a non-cash benefit. As an employer, you set up the arrangement by changing the terms of the employee's employment contract. The employee must agree to this change.

The employee's gross salary is reduced by the agreed amount before tax and National Insurance are calculated. Because the taxable salary is lower, both the employee and employer pay less National Insurance. The employer provides the benefit in place of the salary given up.

The process follows four clear steps: the employer and employee formally agree to vary the employment contract; the revised contract confirms the reduced salary and the benefit provided in exchange; the employee's gross salary is reduced before tax and NI are calculated; and the employer provides the agreed benefit.

How Much Can an Employee Save?

The saving depends on the benefit, the employee's tax rate, and their NI rate. Here is a straightforward example for a basic rate taxpayer sacrificing £1,200 per year into a pension:

Many employers choose to pass some or all of their NI saving back to the employee by increasing the pension contribution, making the arrangement even more valuable.

Which Benefits Can Be Sacrificed?

The most commonly used salary sacrifice arrangements include:

• Pension contributions -the most widely used arrangement, offering full income tax and NI relief for both parties up to the annual allowance
• Electric vehicles -one of the most tax-efficient benefits currently available, with low benefit in kind rates of just 4% for 2026/27 rising gradually to 9% by 2029/30
• Cycle to Work -employees sacrifice salary for a bike and cycling equipment, exempt from tax and NI
• Childcare -childcare vouchers and directly contracted employer-provided childcare that started on or before 4 October 2018 remain exempt from tax and NI under salary sacrifice
• Additional annual leave -employees can sacrifice salary to buy extra holiday days
• Health screening and gym membership -available under some arrangements though subject to benefit in kind rules

Optional Remuneration Arrangements -OpRA Rules

All salary sacrifice arrangements must meet HMRC's Optional Remuneration Arrangements rules, known as OpRA. These rules were introduced in April 2017 to prevent employees from exchanging salary for benefits with a lower taxable value than the cash given up.

Under OpRA, the taxable value of most benefits provided through salary sacrifice is the higher of the benefit in kind value or the amount of salary sacrificed. However, certain benefits are exempt from OpRA and retain their full tax advantage regardless of the salary given up. These include:

• Pension contributions
• Employer-provided pension advice
• Childcare vouchers (pre-October 2018 schemes)
• Cycle to Work
• Ultra-low emission vehicles -cars with CO2 emissions of 75g/km or below, including electric vehicles

This is why electric vehicle salary sacrifice remains particularly attractive -it sits outside OpRA entirely and retains its full tax and NI relief.

Rules and Restrictions

There are several important rules employers must follow:

A salary sacrifice arrangement must not reduce an employee's cash earnings below the National Minimum Wage rates. Employers must put procedures in place to cap salary sacrifice deductions and ensure NMW rates are maintained at all times.

If an employee wants to opt in or out of a salary sacrifice arrangement, the employment contract must be amended with each change. The contract must be clear on what the employee's cash and non-cash entitlements are at any given time.

Salary sacrifice can affect statutory payments such as maternity pay, paternity pay, and sick pay, as these are calculated using average earnings. If salary is reduced through sacrifice, statutory entitlements may also reduce. Employers should explain this clearly to employees before they enrol.

Reporting Requirements

Most non-cash benefits provided through salary sacrifice must be reported to HMRC at the end of the tax year. From April 2027, many of these benefits will need to be reported in real time through payroll as part of the mandatory payrolling of benefits in kind regime. Employers should begin reviewing theirpayroll systems now to ensure they are ready.

Electric Vehicle Salary Sacrifice in 2026/27

Electric vehicle salary sacrifice remains one of the most compelling benefits an employer can offer in 2026/27. The benefit in kind rate for zero-emission cars is just 4% for 2026/27, rising to 5% in 2027/28, 7% in 2028/29, and 9% in 2029/30. These low rates mean the tax payable on an electric company car is significantly lower than for a petrol or diesel equivalent.

Electric car salary sacrifice is governed by separate benefit in kind legislation specifically designed to encourage EV adoption and is completely unaffected by the upcoming pension salary sacrifice changes.

Big Change Coming -Pension Salary Sacrifice Cap from April 2029

The most significant change on the horizon for salary sacrifice is a new cap on NI relief for pension contributions.

From 6 April 2029, only the first £2,000 of employee pension contributions made through salary sacrifice each year will be exempt from National Insurance contributions. Any amount sacrificed above £2,000 will be subject to both employee and employer Class 1 NI at the usual rates.

Income tax relief on pension contributions through salary sacrifice remains completely unchanged. All employer pension contributions -whether made via salary sacrifice or not -will continue to be free of NI contributions.

To illustrate the impact, using 2026/27 NI rates:

Around 3.3 million UK employees and approximately 290,000 employers are expected to be affected by this change. Most employees making typical auto enrolment contributions are unlikely to see any impact -the change primarily affects those making higher pension contributions through sacrifice, particularly higher earners and those with enhanced pension packages.

What Employers Should Do Now

Although the pension cap does not come into force until April 2029, the lead time is important:

• Review your current pension salary sacrifice arrangements and model the financial impact on your business
• Identify employees contributing above £2,000 per year through sacrifice and consider how to communicate the change to them
• Review flexible benefit and cash allowance packages that may be affected
• Begin conversations with your payroll provider about the system changes that will be needed
• Consider whether salary sacrifice remains the most appropriate structure for high earners or whether direct employer contributions outside sacrifice may be more efficient above the £2,000 threshold
• Ensure all existing salary sacrifice arrangements remain compliant with the National Minimum Wage as rates rise from April 2026