Benefits in kind: how perks from your employer are taxed

A benefit in kind is anything your employer gives you that is not plain wages: a company car, private medical insurance, a cheap loan, shares, or extra money paid into your pension instead of your pay packet. Most of these perks count as taxable income, so HMRC treats them as part of what you earn¹. Getting a company car or a benefit like workplace healthcare is one of the life events that changes your tax code, because the tax due on the benefit has to be collected somewhere².

The biggest exception, and the reason most people come to this subject, is salary sacrifice. Salary sacrifice lets you exchange part of your salary for a non-cash benefit from your employer, such as increased pension payments³. For certain benefits, the salary you give up is not subject to income tax or National Insurance at all, which is why these arrangements are offered so widely. But a lower salary has knock-on effects on sick pay, maternity pay, State Pension building and anything else measured against your pay, and from April 2029 the National Insurance exemption for pension contributions through salary sacrifice will be capped at £2,000 a year⁴.

Salary sacrifice: swapping part of your pay for a benefit

Salary sacrifice means you and your employer agree to change your contract so that part of your pay stops being paid to you and is spent on a benefit instead. In the most common form, you give up part of your salary and your employer pays this straight into your pension⁵. The arrangement is sometimes called a "SMART" scheme or "salary exchange", but the mechanics are identical whatever name is used⁵.

The benefit does not have to be a pension. Employers use salary sacrifice to provide bicycles and cycling safety equipment, workplace nurseries, employer-provided pensions advice and, for arrangements that started on or before 4 October 2018, employer-provided childcare. For these categories, the salary you forgo is not subject to income tax or National Insurance contributions³. For most other benefits, that treatment ended in April 2017, when the tax and employer National Insurance advantages of salary sacrifice schemes were removed⁶. Since then, sacrificing salary for a perk outside the protected list usually leaves you paying tax on the benefit anyway, which is why pensions remain the main use of the arrangement.

Two points about how the arrangement works are worth fixing in your mind early. First, salary sacrifice contributions are not tax deductible: the saving comes from the sacrificed pay never being taxed in the first place, not from a deduction you claim later³. Second, the agreement is a genuine change to your contract, not a payroll instruction, which is why it cannot be applied to pay you have already received and why your consent matters.

How salary sacrifice cuts tax and National Insurance

Employment income is charged to income tax under the Income Tax (Earnings and Pensions) Act 2003, which covers wages, salaries and benefits from your job⁷. Salary sacrifice works because the sacrificed pay stops being your employment income at all: it becomes your employer's money, spent on the benefit. In some cases, this will mean you and your employer pay less tax and National Insurance⁵.

The National Insurance side is where the real money is. Employers do not pay National Insurance contributions on pension contributions, but employees and self-employed people do¹¹. When pay is sacrificed into a pension, neither you nor your employer pays employee or employer National Insurance on that amount, within the rules that apply. The Upper Earnings Limit, above which the employee rate drops to 2%, is being maintained at £50,270 from April 2028 to April 2031, and the Secondary Threshold for employers is being held at £5,000 over the same period¹², so the value of the saving depends on where your pay sits against those thresholds.

How this compares with the ordinary way of paying into a pension matters too. Under a net pay arrangement, your employer takes your pension contribution and the government's contribution as tax relief from your pay before deducting tax, so you pay tax on what is left¹³. Salary sacrifice goes further by removing the pay from National Insurance as well. One group gains nothing from any of this: staff who do not pay income tax do not get tax relief, whichever tax relief method their scheme uses¹⁴. For them, salary sacrifice can still reduce National Insurance, but the income tax saving that motivates most members does not exist.

A worked example: what changes in your pay and pension

Take a simple case, based on a published example: an employee subject to UK tax with a gross salary of £24,000 in the 2026/27 tax year, making a personal contribution of £960 net a year into their plan, which after 20% tax relief from the government is a gross personal contribution of £1,200⁵. Under salary sacrifice the mechanics change. The sacrificed amount never appears in your taxable pay, so no income tax is taken from it, and no employee National Insurance either⁵. Your employer also saves on their National Insurance payments and might share those savings to increase your contributions even further, though the amount shared is entirely at their discretion and they may change it at any time⁵. Your take-home pay falls, but by less than the amount sacrificed, because the tax and National Insurance that would have been taken from it are no longer due.

What happens to the money later is the other half of the picture. UK private pension saving works on an "exempt, exempt, taxed" model for income tax: contributions go in without tax, growth is not taxed, but the income you draw in retirement is taxed¹¹. When you retire, you can normally take some of your pension as a tax-free cash lump sum; with a defined contribution scheme you use the rest to buy yourself a regular income, on which you pay tax, and with a defined benefit scheme the rest comes as regular income, also taxed¹⁵.

The tax on that retirement income has to be collected somehow. Your State Pension is paid without tax taken off, and HMRC usually changes your tax code so the extra tax is paid from your other income, such as wages or a private pension¹⁶. Where your retirement income is small, HMRC may work out the bill for you through Simple Assessment instead: in one official worked example, a taxpayer with a £16,000 State Pension and £1,500 of private pension income was due to pay £986 in total¹⁸. Salary sacrifice does not change any of this; it only changes how much sits in the pot waiting to be taxed.

Your employer's National Insurance saving and whether it is shared

Every salary sacrifice arrangement also saves your employer National Insurance, because the sacrificed pay leaves their bill as well as yours. Employers do not pay National Insurance on pension contributions¹¹, so moving pay into a pension removes it from the employer's contributions too. Some employers pass part of this saving back to you, commonly as an extra pension contribution on top of the sacrificed amount. Whether any of it is shared is entirely a matter of your employer's scheme rules; there is no rule requiring them to pass it on.

The scale of the relief involved explains why the government has been looking at it. Income Tax and National Insurance reliefs on pension contributions are worth over £70 billion a year¹⁹, and salary sacrifice is one of the ways those reliefs are delivered. The reform taking effect from April 2029, covered in full later on this page, is expected to have a significant impact on 290,000 employers who operate salary sacrifice arrangements for pension contributions¹⁹.

For you as an employee, the practical questions when a scheme is offered are: does the employer add anything to the pension on top of the sacrificed amount, and is that addition guaranteed in the scheme rules or discretionary? Both answers belong in the scheme documentation your employer must give you before you sign the contract change.

The minimum wage limit and who gains least

Salary sacrifice is unlikely to work for those on low incomes, because your take-home salary is not allowed to fall below the national minimum wage³. This is a hard legal floor, not a guideline: an arrangement that would push your pay under the minimum wage cannot be operated, however willing you are. For someone close to the minimum wage, that leaves little or no salary available to sacrifice, so the whole route is effectively closed.

Just above that floor, the gains shrink. Salary sacrifice may not be suitable, or may only have a minimal benefit, for employees with low earnings¹⁵. Someone who does not pay income tax gets no tax relief from any pension contribution method, so the income tax half of the saving disappears. The National Insurance saving remains, but employee National Insurance only applies above its thresholds, so a low earner may have little or nothing at stake there either. The people who gain most are higher earners, whose sacrificed pay would otherwise have been taxed at the higher rates of income tax and charged employee National Insurance on top.

There is also a group for whom the arithmetic works but the side effects do not: people whose pay is just above the thresholds that govern statutory payments and benefit entitlements. For them, even a modest sacrifice can tip average earnings below a limit, with consequences covered in the next section. Anyone in that position needs to look past the tax saving at what else is measured on their salary.

How a lower salary can affect sick pay, maternity pay and other benefits

This is the part of salary sacrifice that catches people out. Statutory Sick Pay and Statutory Maternity Pay both depend on your average weekly earnings reaching the lower earnings limit. If your average weekly earnings, calculated for Statutory Sick Pay purposes, fall below the lower earnings limit, you will lose the right to Statutory Sick Pay; if they fall below it when calculated for Statutory Maternity Pay, you may lose entitlement to that too²⁰. For the remaining 33 weeks of Statutory Maternity Pay, the weekly amount is the lowest of either the standard rate of £194.32 for the year 2026 to 2027 or 90 per cent of your average gross weekly earnings²¹, so a lower salary can also reduce the weekly amount, not just the entitlement.

The same principle reaches beyond statutory pay. Reduced Earnings Allowance could affect any income-related benefits that you or your partner get²². Buying partnership shares under a Share Incentive Plan may affect your entitlement to contribution-based, earnings related and means tested state benefits, tax credits and work related payments, because no National Insurance contributions were paid on the pay used²³. Not every effect is negative: amounts deducted from earnings under tax-exempt schemes, for example payments to purchase shares under a Share Incentive Plan, are not included when your Universal Credit entitlement is calculated²⁰.

For self-employed women claiming Maternity Allowance, the rules work through Class 2 National Insurance: with no Class 2 contributions paid you get the lower rate, with 13 weeks of contributions within the test period you are treated as earning enough for the standard rate, and with fewer than 13 weeks the amount is worked out on what was paid²⁴. The general lesson is that anything based on your earnings, statutory or means-tested, needs checking against your post-sacrifice salary before you sign.

Mortgages, borrowing and other things based on your salary

A salary sacrifice arrangement lowers your official gross salary, and several things in life are measured against that number. Lenders assessing a mortgage application work from your income as reported, and a lower gross salary can reduce what they will lend, even if your total package, pay plus pension contribution, is unchanged. The same applies to other borrowing and to any application that asks for your salary.

Employer pension calculations are another example of how the definition of pay matters. When an employer works out pensionable earnings, they must include salary, wages, commission, bonuses, overtime, statutory sick pay, statutory maternity pay, ordinary or additional statutory paternity pay and statutory adoption pay²⁵. What counts as "salary" after a sacrifice, and whether the sacrificed amount is treated as pensionable, depends on the scheme's rules, so the question is worth asking directly.

Payments when you leave a job follow their own rules. Unpaid wages, holiday pay, bonuses, payments for agreeing to a restrictive covenant and payments instead of working during notice are all treated as earnings, subject to tax and National Insurance²⁶. And if your employer offers shares as a benefit, some schemes have tax advantages meaning you pay no income tax or National Insurance when the shares are awarded, with charges possible when you take them out²⁷. The common thread is that "what you earn" is a legal construct, and salary sacrifice changes it.

Joining or leaving a scheme: your rights

Your employer cannot force you to give up part of your pay for a salary sacrifice scheme; it should be something you choose³. Because it is a contract change, it needs your agreement, and a valid agreement only takes effect from the date the contract is drawn up between you and your employer, not before³. You also do not have to undergo a credit check to enter into a salary sacrifice scheme, as the money is taken from your pay rather than lent to you³.

Leaving works differently depending on what the arrangement covers. You can opt out of salary sacrifice at any time, but if you were using it to finance something you own, for example a bicycle, you must still pay off the outstanding amounts³. For pensions specifically, your employer must let you leave the workplace pension scheme, called opting out, if you ask, and must refund money you have paid if you opt out within one month⁵. Contributions made through salary sacrifice after that point are normally treated as employer payments into the pension, so they are subject to the pension scheme's rules on leaving, not simply returnable as cash.

Share schemes have their own exit rules. Under a Share Incentive Plan, there are no tax or National Insurance charges when shares are awarded, but charges may apply if shares are taken out within five years of joining²³. If you take free shares or matching shares out during the first three years, you pay income tax and National Insurance on the market value of the shares when taken out²³. No income tax or National Insurance is payable if shares come out because of injury or disability, redundancy, sale of the company or business out of the group, retirement or death²³.

Changes ahead: the £2,000 cap on National Insurance relief

The biggest change to salary sacrifice in a decade is on its way. As announced at Autumn Budget 2025, the government is changing how salary sacrifice for pension contributions works⁸. From April 2029, the amount that is exempt from National Insurance contributions will be capped at £2,000 a year for employee contributions made via salary sacrifice⁸. Earnings forgone above the £2,000 contribution limit for a tax year will be subject to National Insurance¹⁹. The cap has been legislated: the first regulations under the relevant provision of the Social Security Contributions and Benefits Act 1992 set the limit at £2,000 for a tax year²⁸.

The government's own impact assessment gives a sense of the scale. An estimated 56% of employees currently making typical pension contributions through salary sacrifice will be unaffected, because their contributions fall under the threshold; the remaining 44% of employees using salary sacrifice for pensions would be impacted by the measure¹⁹. The change removes the exemption for employer pension contributions for Class 1 National Insurance contributions where arrangements exceed the limit¹⁹. It will not change the impact of salary sacrifice on adjusted net income¹⁹, so the income tax position is untouched. For employers, the reform carries a £20 million one-off cost and a £30 million continuing average annual impact¹⁹.

For anyone contributing more than £2,000 a year through salary sacrifice, the practical effect from April 2029 is that National Insurance becomes payable on the excess, for both employee and employer. Whether the arrangement still saves money overall then depends on the income tax saving on the sacrificed pay, which is unchanged, weighed against the National Insurance now due. The history matters here too: from April 2017, the tax and National Insurance advantages in relation to most other benefits were largely withdrawn¹⁹, and this reform narrows the pension route in the same direction.

Where to get help

If something goes wrong with a salary sacrifice arrangement, or you believe you were enrolled without agreeing, the first stop is your employer or pension scheme, and then HMRC. For complaints about financial services, including some pension matters, the Financial Ombudsman Service can help with complaints from consumers, and its website sets out who it can help²⁹. For pension scheme questions, The Pensions Regulator's guidance for employers and schemes is the official reference point¹⁴.

For working out how a change in pay affects your benefits, an official benefits calculator covers income-related benefits, tax credits, contribution-based benefits, Council Tax Reduction, Carer's Allowance and Universal Credit, including how your benefits will be affected if you start work or change your working hours³⁰. In Scotland, the Scottish Government's cost of living site includes debt and money guidance³¹. For the underlying tax rules, the guides to income tax, tax codes and PAYE on this site cover how your bill is worked out and collected, and National Insurance covers the classes and thresholds that salary sacrifice interacts with.