What is a salary sacrifice arrangement?
Answered 17 March 2026
What is a Salary Sacrifice Arrangement?
HMRC Guidance / Practice
A salary sacrifice arrangement occurs when an employee agrees not to receive part of their pay, in return for the employer providing some form of non-cash benefit. The "sacrifice" is achieved by varying the employee's terms and conditions of employment relating to pay.
More specifically, under s.289A(5) ITEPA 2003, a salary sacrifice arrangement in relation to an employee is one under which:
- the employee gives up the right to receive an amount of general earnings or specific employment income in return for a payment, reimbursement, or non-cash benefit; or
- the amount of other general earnings or specific employment income received by the employee depends on the amount of the payment or reimbursement.
For a salary sacrifice to be effective, two conditions must be met:
- The employment contract must be effectively varied before the changes are implemented — any right to receive cash wages/salary must be given up before the employee becomes entitled to the remuneration.
- The true construction of the revised contractual arrangement must be that the employee is entitled to lower cash remuneration and a benefit in its place.
Key practical points:
- If the employee retains the right to give up the non-cash benefit at any time and revert to the original (higher) cash salary, the non-cash benefit may be taxable as "earnings" under s.62 ITEPA 2003.
- A salary sacrifice arrangement cannot reduce an employee's cash earnings below the National Minimum Wage.
- Where non-cash benefits are provided under a salary sacrifice arrangement, any tax/NIC exemptions that would otherwise apply to those benefits must still have all their conditions fully satisfied.
- Expenses paid or reimbursed under a salary sacrifice arrangement are treated as earnings subject to PAYE and Class 1 NICs (from 6 April 2016 onwards), though the employee may still claim a tax deduction for qualifying expenses actually incurred.
Citation sources
From 6 April 2016, the Social Security (Contributions) (Amendment) (No. 2) Regulations 2016 (SI 2016/352), amended the Social Security (Contributions) Regulations 2001 (SI 2001/1004) for the NICs treatment of expenses and allowances paid by salary sacrifice, at an ‘unapproved’ scale rate, or where they form part of a round sum allowance. This mirrors the income tax treatment of expenses and allowances introduced by sections 289A – 289E of ITEPA 2003. The Social Security (Contributions) Regulatio
For an explanation of what is a salary sacrifice, see EIM42750. For the income tax effects of a salary sacrifice, see EIM42755. Salary sacrifice arrangements are effective when the contractual right to cash remuneration has been reduced. For this to happen two conditions have to be met: the employment contract must be effectively varied before the changes are implemented. Any right to receive cash wages/salary must be given up before the employee is entitled to receive the remuneration. See EIM4
Salary sacrifice happens when an employee requests not to receive part of their pay due to them, in return for the employer’s agreement to provide the employee with some form of non-cash benefit. The ‘sacrifice’ is achieved by varying the employee’s terms and conditions of employment relating to pay. Note: You mustn’t comment on how to set up a salary sacrifice arrangement or whether the customer should join a salary sacrifice scheme. For further information on how to deal with salary sacrifice,
S289A ITEPA 2003 For periods prior to 6 April 2016 see EIM30050. The exemption for paid or reimbursed expenses does not apply where the expenses are paid or reimbursed under the terms of a relevant salary sacrifice arrangement. A relevant salary arrangement means an arrangement, whenever made, whether before or after the employment began, under which the employee gives up the right to receive an amount of general earnings or specific employment income in return for the payment or reimbursement,
Some non-cash benefits qualify for an exemption from tax and/or may be disregarded before calculating NICs. If this is the case for a benefit provided to an employee as part of a salary sacrifice arrangement, all conditions that apply to the exemption must be satisfied. For example, some exemptions require that the provision of the benefit is made available to all employees. This condition must be fully satisfied, whether or not all employees are able to participate in a salary sacrifice arrange