Salary Sacrifice Arrangements Can Still Be Beneficial

The following article is an excerpt taken from the guide 101 Employer and Employee Tax Tips 2025/26 edition.  Save 40% today on the book.

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The opportunities to use salary sacrifice arrangements to save tax and National Insurance were seriously curtailed with the introduction of the alternative valuation rules that apply from 6 April 2017 to value benefits provided under an optional remuneration arrangement (OpRA). The pitfalls associated with these rules are discussed in Tip 3.  

Where the rules apply, the benefit of any associated tax exemption is lost if a benefit is provided through a salary sacrifice or other OpRA. Under a salary sacrifice arrangement, an employee gives up an amount of salary in return for a benefit in kind. Where the benefit is one of the few that remains exempt from tax when provided under a salary sacrifice arrangement, the opportunity remains for the employee to save tax and the employer and employee to save National Insurance where the benefit is made available to the employee under a salary sacrifice scheme. 

The alternative valuation rules do not apply to the following benefits, and thus the associated tax exemption remains available where provision is made via a salary sacrifice scheme or other OpRA: 

• employer-provided pension savings; 

• employer-provided pension advice; 

• childcare vouchers; 

• employer-supported childcare; 

• workplace nurseries; and 

• employer-provided cycles and cyclists’ safety equipment (including ‘cycle to work’ schemes). 

Providing any benefit from the above list under a salary sacrifice arrangement will enable the employee to save the tax that would have been payable on the cash salary, and the employee and the employer to save the Class 1 National Insurance that would have been paid had the employee continued to receive the ‘sacrificed’ salary.  

However, it should be noted that an employee can only benefit from the limited exemptions for employer-supported childcare and childcare vouchers if they were a member of their employer’s scheme on 4 October 2018. Employees should also check that they would not be better off using the Government’s tax-free top-up childcare scheme – it is not possible to benefit from both the Government scheme and the tax exemption. 

In addition to the benefits listed above, the alternative valuation rules do not apply to low emission cars with CO2 emissions of 75g/km or less. Where such cars are provided under a salary sacrifice arrangement or if a cash alternative is offered, the provision of the low emission car is taxed by reference to the company car tax rules, rather than by reference to the alternative valuation rules (see Tip 3). 

A salary sacrifice scheme allows the employer to offer employees the opportunity to benefit from the tax exemptions available for the benefits listed above, without passing the cost of providing those benefits to the employee.  

A salary sacrifice arrangement can also generate National Insurance savings for the employee where the benefit provided is either not exempt from tax or the exemption is lost as a result of the alternative valuation rules coming into play. The employee’s National Insurance saving results from replacing cash salary (which is liable to employee and employer Class 1 contributions) with a non-cash benefit which is liable to employer-only Class 1A contributions. However, when taking into account the administrative costs of administering the salary sacrifice arrangement, this may only be worthwhile if the National Insurance savings are significant. The recent reductions in the main primary Class 1 rates have reduced the potential savings making it unlikely that a salary sacrifice scheme will be worthwhile in the absence of a permitted exemption. 

For a salary sacrifice arrangement to be regarded as effective by HMRC, the employee must not be able to revert to the higher salary at will.