Salary sacrifice (also known as salary exchange or salary swap) is one of those rare tax perks that benefits both employers and employees.
When done correctly, it allows businesses to save on National Insurance (NI) contributions while giving employees valuable benefits at a lower cost. And best of all – it’s completely HMRC-approved!
But is salary sacrifice for employers worth the hassle of setting it up? Spoiler alert: yes, it is. Here’s why.
What is salary sacrifice?
Salary sacrifice is an agreement between an employer and an employee to exchange part of their cash salary for a non-cash benefit.
It works because some benefits aren’t taxed in the same way as salary, meaning both parties save money. The employee gets tax and NI savings, and the employer reduces their NI bill – a win-win situation.
This is particularly attractive because employer NI contributions are rising to 15% in April 2025, making salary sacrifice even more valuable.
| Want to know how much you could save in tax? Email us at [email protected] and we’ll help you work it out. |
But employers, beware!
While salary sacrifice is a great tool, there are rules to follow.
- Employees can’t be paid below the National Minimum Wage. If someone’s salary is already close to the limit, they can’t participate.
- The agreement must be in writing. Salary sacrifice changes an employee’s contract, so they need to formally agree to the change.
- Not all benefits qualify. HMRC has strict rules on what salary sacrifice can be used for.
What benefits can you offer instead of cash wages?
Salary sacrifice for employers can be used for a variety of tax-efficient benefits, including:
- Pension contributions – One of the most effective uses of salary sacrifice, as pension contributions are exempt from tax and NI.
- Electric company cars – A great way to help employees lease electric vehicles (EVs) at a lower cost while saving on employer NI.
- Cycle-to-work schemes – A well-established and popular salary sacrifice benefit.
- Childcare schemes – Although some older schemes have been replaced by Tax-Free Childcare, some arrangements still qualify.
- Healthcare and gym memberships – These can be included, but tax treatment varies.
Why should employers be interested?
Because it saves money, and once set up, the savings continue automatically. (Well, until you change it or HMRC change the tax rules!).
Here’s an example of salary sacrifice for pensions:
Let’s say you have five employees, each contributing £120 per month into their pension.
- Each employee saves £12 per month in NI.
- The employer saves £89.87 per month in NI.
- That’s £1,078 per year in savings for the business!
If your employees contribute more, the savings increase. With a contribution of £183 per month per employee, the business would save £1,651 per year.
Now imagine if you had 20 employees… The savings quickly add up to thousands of pounds per year.
What about salary sacrifice for electric cars?
For businesses looking to offer EVs through salary sacrifice, the potential savings are even bigger. Yes, you will still pay some Class 1A NIC on the car benefit, but the rules currently work in your favour.
For example, let’s say you provide an electric company car with:
- A salary sacrifice of £400 per month
- A list price of £45,000
Based on 2025/26 tax rates:
- The employer’s NI saving is £720 per year.
- The Class 1A NIC on the car benefit is £202.50 per year.
- Net employer saving: £517.50 per year, per employee.
If five employees take part in the scheme, the business saves £2,587.50 per year.
Meanwhile, the employee gets a heavily discounted EV at a far lower cost than if they leased one privately.
Interested in how EV salary sacrifice works? We’ve written more about it here: Salary swap for an EV car.
How to implement salary sacrifice
Setting up salary sacrifice for employers is easier than you might think. You just need to:
- Decide which benefits to offer – Pensions and EVs are the most common choices, but it depends on your workforce.
- Create a salary sacrifice agreement – This needs to be signed by employees and must comply with both HR legislation and HMRC rules.
- Run the salary sacrifice through payroll – The payroll system needs to be updated to reflect the salary changes and NI savings.
| Don’t want to do it yourself? Get JVCA to do it for you! |
Potential pitfalls to avoid
As with any HMRC approved process you need to make sure that you tick the relevant boxes to make sure you have met the criteria. Not only that, but there are some other things you should bear in mind:
- It must comply with HMRC rules – Salary sacrifice is a legitimate tax-saving tool, but only if set up correctly.
- Tax rules can change – What works now may not work forever. This is why it’s best to implement salary sacrifice now while the savings are significant.
- It’s a long-term commitment – Once an employee signs up, it can be difficult to reverse without good reason.
Ready to start saving tax?
Salary sacrifice is a fantastic way for employers to save money while offering great benefits to employees. But it must be set up correctly to comply with both tax and employment law.
At JVCA, the friendly accountants, we can:
✔ Help you set up the right salary sacrifice schemes
✔ Provide all necessary documentation for compliance
✔ Handle the payroll changes to ensure smooth processing
Email us at [email protected] to start saving tax for your business today!
