NI Impacts of Salary Sacrifice

Key facts

Salary sacrifice reduces gross pay, lowering both employee and employer NI contributions.
The NI saving for employers is 15% (from April 2025) on each pound of salary sacrificed.
Since April 2017, OpRA rules restrict tax/NI advantages to pension contributions, childcare, cycle-to-work, and ultra-low emission cars.
Salary sacrifice reduces pensionable pay, which may affect state pension entitlement if earnings fall below the Lower Earnings Limit (£6,708 for 2026/27).
Mortgage lenders typically assess income after salary sacrifice, potentially reducing borrowing capacity.

How Salary Sacrifice Works

A salary sacrifice (also called “salary exchange”) is a contractual arrangement between employer and employee. The employee agrees to give up part of their future cash salary in return for a non-cash benefit provided by the employer.^[1]

The key mechanism is that the employee’s contractual gross pay is permanently reduced (for the duration of the arrangement). Because NI is calculated on contractual earnings, both sides save:

Employee saves: Class 1 primary NI at 8% (between the Primary Threshold and Upper Earnings Limit)
Employer saves: Class 1 secondary NI at 15% (from April 2025, on earnings above the Secondary Threshold)

Important: Salary sacrifice must be a genuine contractual change to future pay. Simply redirecting existing salary to pay for a benefit after it has been earned does not constitute salary sacrifice and provides no NI saving.

Worked Example

An employee earning £35,000 per year sacrifices £3,000 into an employer pension contribution:^[3]

	Without Sacrifice	With £3,000 Sacrifice	Saving
Gross salary	£35,000	£32,000
Employee NI (8% above £12,570)	£1,794	£1,554	£240
Income Tax (20% above £12,570)	£4,486	£3,886	£600
Net take-home pay	£28,720	£26,560
Pension contribution	£0	£3,000
Total value (pay + pension)	£28,720	£29,560	£840
Employer NI (15% above £5,000)	£4,500	£4,050	£450

In this example, the employee is £840 better off (the combined NI and tax saving), and the employer saves £450 in NI. Many employers pass some or all of their NI saving into the employee’s pension as an additional contribution.

Common Salary Sacrifice Benefits

The most popular benefits offered through salary sacrifice include:^[1]

Benefit	NI/Tax Advantage Post-OpRA?	Notes
Employer pension contributions	Yes — full NI and Income Tax saving	The most popular salary sacrifice arrangement; saves NI for both parties
Cycle-to-work scheme	Yes — full NI and Income Tax saving	Employer purchases bike and equipment; employee sacrifices salary over 12–18 months
Ultra-low emission cars (≤75 g/km CO2)	Yes — full NI and Income Tax saving	Electric and plug-in hybrid company cars via salary sacrifice
Employer-provided childcare	Yes — full NI and Income Tax saving	Workplace nurseries or employer-contracted childcare
Private medical insurance	No — OpRA applies	Taxed on the higher of the benefit value or salary forgone
Gym memberships	No — OpRA applies	No NI/tax advantage from salary sacrifice

April 2017 OpRA Rules

The Optional Remuneration Arrangement (OpRA) rules, introduced in April 2017, were designed to limit the tax advantages of salary sacrifice for most benefits. Under OpRA, if an employee gives up salary in exchange for a benefit, the taxable value is the higher of:^[2]

The amount of salary given up, or
The taxable value of the benefit under normal BIK rules

This effectively removes any NI or tax advantage for benefits where the salary sacrificed exceeds the normal BIK value (which is most non-exempt benefits like medical insurance, school fees, and gym memberships).

Exempt from OpRA: Four categories of benefit are exempt from the OpRA rules and retain full salary sacrifice NI/tax advantages: employer pension contributions, employer-provided childcare, cycle-to-work schemes, and ultra-low emission vehicles (CO2 ≤75 g/km).

Impact on State Pension, Loans, and Benefits

Reducing gross pay through salary sacrifice can have knock-on effects beyond immediate NI savings:^[1]

State pension: If salary sacrifice takes earnings below the Lower Earnings Limit (£6,708 for 2026/27), the employee may not accrue a qualifying year for state pension. Earnings must remain above this threshold to maintain entitlement.
Statutory payments: Statutory Maternity Pay, Statutory Sick Pay, and similar payments are based on average earnings. Salary sacrifice reduces these averages, potentially lowering statutory pay entitlements.
Mortgage applications: Most lenders use the post-sacrifice salary figure when assessing affordability. A £5,000 pension sacrifice on a £40,000 salary means the lender may assess income at £35,000.
Student loan repayments: Salary sacrifice reduces the earnings figure used for student loan repayment calculations, potentially lowering monthly repayments or deferring repayment.
Tax credits and benefits: Sacrificed salary is excluded from income calculations for Universal Credit and Tax Credits purposes, which may affect entitlement.

Tip: Employers should ensure that salary sacrifice does not reduce any employee’s pay below the National Minimum Wage. The post-sacrifice cash salary must remain at or above NMW for the hours worked.

Employer Considerations

From the employer’s perspective, salary sacrifice delivers real NI savings of 15% on every pound sacrificed (from April 2025). For a workforce of 100 employees each sacrificing £3,000 into pensions, the employer NI saving would be £45,000 per year.

Key considerations for employers:

Salary sacrifice arrangements must be set up as contractual variations with proper documentation
Employees must be able to opt out (typically with one month’s notice or at each annual renewal)
Life-event triggers (marriage, redundancy, pregnancy) should allow employees to exit the arrangement early
The arrangement must not reduce pay below the National Minimum Wage

Frequently Asked Questions

How does salary sacrifice save NI?

When an employee sacrifices salary, their contractual gross pay is reduced. Since NI is calculated on gross earnings, both the employee’s Class 1 primary NI (8% between the Primary Threshold and Upper Earnings Limit) and the employer’s Class 1 secondary NI (15% above the Secondary Threshold) are reduced. The combined NI saving can be up to 23% of the amount sacrificed.

What benefits still qualify for NI savings after the OpRA rules?

Since April 2017, only four categories of benefit retain full NI advantages under salary sacrifice: employer pension contributions, employer-provided childcare (including workplace nurseries), cycle-to-work scheme bikes and cycling equipment, and ultra-low emission cars with CO2 emissions of 75 g/km or less.

Does salary sacrifice affect my state pension?

It can. If salary sacrifice reduces your earnings below the Lower Earnings Limit (£6,708 for 2026/27), you would not build up a qualifying year for state pension purposes. Most full-time employees remain well above this threshold, but part-time or lower-paid workers should check carefully.

Can salary sacrifice affect my mortgage application?

Yes. Most mortgage lenders assess income based on your contractual salary after sacrifice, not your pre-sacrifice salary. This means a large salary sacrifice (e.g. for pension contributions) could reduce the amount you are able to borrow. Some lenders will consider pre-sacrifice salary if you provide evidence of the arrangement.

Sources

Salary sacrifice: how it works — GOV.UK
Optional remuneration arrangements — GOV.UK
Rates and thresholds for employers — GOV.UK