What is salary sacrifice?

Salary sacrifice (also known as ‘salary exchange’) is an arrangement in which an employee agrees to contractually reduce their entitlement to cash remuneration in exchange for receiving a non-cash benefit. The non-cash benefit may be provided in a tax and National Insurance contributions (NICs) beneficial manner.

Salary sacrifice arrangements can be made in relation to ongoing cash remuneration (eg salary) as well as in relation to once-a-year or one-off situations (eg bonus and termination payments).

This Practice Note uses the term ‘salary sacrifice’ to capture all the above situations.

It is important to note that a salary sacrifice arrangement must never reduce an employee’s cash remuneration below the national minimum wage (NMW)/national living wage (NLW) and, therefore, employers must incorporate procedures into any arrangements to ensure this does not happen.

Additionally, following Finance Act 2017, significant reforms to the taxation of salary sacrifice arrangements were introduced which substantially reduced the tax effectiveness of many arrangements. These changes are known as the Optional Remuneration Arrangements (OpRA) legislation. See Practice Note: Optional remuneration