• Money Mentor

Salary Sacrifice Schemes

Updated: May 17

Under a salary sacrifice scheme agreement, sometimes referred to as salary exchange, an employee agrees to a reduction in their salary and in return the employer pays a pension contribution on the employee's behalf.

Salary Sacrifice Schemes


Similarly, an employee may agree to sacrifice a bonus payment in return for an employer pension contribution. Such an arrangement is beneficial because both the employer and the employee will pay reduced NICs.


The NIC savings can be recycled back into the pension arrangement and a larger contribution paid at no extra cost to the employee or the employer.




HMRC require certain conditions to be fulfilled for a salary sacrifice arrangement to be effective,

  1. There must be a written agreement in place between the employer and the employee to reduce the employees salary,

  2. The agreement must be in place before the salary is actually reduced,

  3. The reduction in salary cannot take the employees salary below the national minimum wage.

A salary sacrifice arrangement will usually be irrevocable, because if the employee can swap between cash earnings and a noncash benefit whenever they like, it will not be a salary sacrifice arrangement.


In these circumstances, any expected tax and NIC advantages under a salary sacrifice arrangement will not apply. However, it may be possible to change the terms of a salary sacrifice arrangement where an employees financial circumstances are altered by a lifestyle change, such as marriage, divorce or an employee's spouse or partner becoming redundant or pregnant.


The Advantages of Salary Sacrifice Schemes can be summarised as follows

  • If the employee was already paying a pension contribution take home pay is usually the same or even slightly higher,

  • If salary sacrifice is being used because of a new pension scheme, the reduction in take home pay will be less than the amount of the gross pension contribution,

  • National Insurance savings made by the employer under the employee may be paid into the pension arrangement to increase the contribution at no additional cost,

  • Since salary is reduced the employees entitlement to working tax credits may be increased,

  • For those on higher earnings, salary sacrifice may be used to reinstate some or all of the personal allowance, where earnings are initially in excess of £100,000,

  • Those with earnings in excess of £50,000 per annum can use salary sacrifice to reduce their earnings back below £50,000 so that the high income child benefit tax charge is not payable.

salary sacrifice scheme

The Disadvantages of Salary Sacrifice Schemes are as follows

  • Salary is reduced for all purposes, this may reduce benefits such as death in service cover however a notional salary may be used by the employer, to ensure that benefits are not reduced,

  • The reduction in salary may reduce the employees borrowing capacity for mortgages and other loans (however changes in the mortgage rules mean lenders will assess a borrowers affordability, rather than using a multiple of salary).

  • Since take home pay is unreduced, or may even be slightly increased, the salary sacrifice arrangement is likely to have little impact on the amount that can be borrowed for a mortgage.

  • The salary reduction may cause a reduction or even loss of other Social Security benefits, such as maternity benefits.


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