Salary sacrifice

The employee gives up contractual cash pay

Salary sacrifice changes what the employee is entitled to receive. They agree to a lower amount of cash pay, usually in exchange for a non-cash benefit such as an employer pension contribution or cycle-to-work benefit.

It is not simply a deduction made after gross pay has been earned. The employer and employee agree a change to the employment contract, which should state the new cash entitlement, the benefit provided and how someone joins or leaves the arrangement. The HMRC employer guidance explains the payroll and tax treatment.

Check the result before changing the contract

Model the effect for the individual before they agree. Salary sacrifice can change Income Tax and National Insurance treatment, but the result depends on the benefit and the arrangement. It can also affect earnings-related benefits, pension calculations and statutory payments.

Say whether workplace pension contributions and other benefits use notional salary or the reduced cash salary. Keep the accepted change with the contract and make payroll's effective date match it.

Keep the 2029 pension change separate from today’s rules

The government has announced a change to the National Insurance treatment of pension salary sacrifice from 6 April 2029. It is a future measure, not the rule for a payroll run before that date.

Apply the current treatment and schedule a review before the change takes effect. The official 2029 announcement should be checked again as implementation detail develops. Avoid putting the future cap or a promise of savings into an evergreen employee policy.