One of the most complicated benefits offered to employees over the last decade is the increase in purchases made through salary sacrifice (SalSac). Whether it’s a capital purchase, such as a car or technology, or pension schemes or bicycles, salary sacrifice has become a preferred option for some employees.
Salary sacrifice reduces an employee’s gross monthly pay and, as such, can affect National Minimum Wage (NMW) and Statutory Maternity Pay (SMP) calculations.
This guide looks at the potential challenges payroll teams may face when calculating salary sacrifice and what employees must consider before enrolling in a SalSac scheme.
MSP Payroll can provide guidance or review calculations to help your payroll team. Click here to speak to our team.
Salary sacrifice: The quick summary for payroll teams in a hurry
The key takeaways from our guide are:
- Salary sacrifice is not just a deduction to pay: When an employee agrees with an organisation to enrol in a SalSac scheme, they are entering into a contractual reduction in salary in exchange for the benefit, in some cases for a set period of time, in others (pensions) for the remaining course of their employment.
- Be careful of the National Minimum Wage: Because SalSac reduces the gross pay of an employee, it could potentially drag low earners below the National Minimum Wage threshold. Employees in these circumstances are ineligible for salary sacrifice and should be unenrolled.
- SMP can be impacted: As with NMW, salary sacrifice can significantly impact SMP as it is calculated based on average weekly earnings AFTER the SalSac deductions have been made.
- Salary sacrifice during parental leave: Employees who utilise salary sacrifice but enter a phase of parental leave can be left in a grey area on whether they should continue to benefit from it. Pensions and purchases should continue, but childcare vouchers have raised issues.
- Communication is key: Salary sacrifice can become very complicated for employees to understand on their payslip, so ensure you communicate the changes fully when they enter into the agreement.
MSP Payroll can help with all aspects of payroll; please click here to speak to the team.
What is salary sacrifice, and what can it be used for?
Salary sacrifice was created as a tax-efficient way to help employees make purchases or contribute to their pensions. When an employee decides to purchase, for example, a car, their contractual salary is reduced by a mutually agreed amount, which is then paid towards the cost of the purchase. In essence, they agree to reduce their salary, and in return, the company pays for an item by the same amount on their behalf.
The same process is true for non-tangible purchases such as pensions; in this instance, the contractual gross salary is reduced by the agreed pension contribution level, and the employer pays this, alongside their usual contribution, into the employee’s workplace pension.
Salary sacrifice has benefits for both employer and employee. As the contractual gross pay is reduced, National Insurance Contributions and Income Tax are also reduced, as these are calculated based on the new pay after deductions.
Companies will often work with a third-party provider for car and technology purchases, who will then set up and process any payments made to them by the organisation on behalf of its employees. It is important to note that salary sacrifice is usually used for non-cash benefits.
There are important changes to pension salary sacrifice contributions and NIC which will come into effect in 2029. Please see our article on what payroll teams need to know – here.
Salary Sacrifice and the National Minimum Wage
As of September 2026, the National Minimum Wage is £12.71 per hour for employees aged 21 and over. By law, an employee cannot be paid less than this amount before NIC and tax deductions. For employees who are paid close to this amount, there is a risk that a salary sacrifice deduction will reduce their contracted pay to below £12.71 per hour.
For instance:
- An employee is paid £15 per hour for a 40-hour contracted week
- This gives a gross annual salary of £31,200
- The employee agrees to a salary sacrifice (for a purchase or Cycle to Work scheme) of £400 per month
- This reduces their gross annual salary to £26,400 or £507.69 per week
- Per hour, this equates to £12.69 taxable pay, which is below the legal NMW
Here we can see that even though the employee is nearly £3 per hour above the NMW, they would not be legally eligible to enrol for a salary sacrifice scheme at this level per month. This could be compounded further if the employee attends training outside of paid working hours, for instance, and incurs unpaid working hours.
Payroll teams must calculate and review employee hourly rates and clearly communicate any issues with employees before accepting a salary sacrifice agreement.
MSP Payroll can support your team with regular National Minimum Wage reviews and employee hourly rate calculations. Please contact us here to find out more.
The impact of salary sacrifice on statutory payments
The reduction of contractual pay because of a salary sacrifice scheme may also impact an employee’s rights to statutory payments such as Statutory Maternity Pay (SMP). HMRC guidance advises that payroll teams clearly review potential impacts before accepting an employee onto a salary sacrifice scheme.
Maternity Pay, Paternity Pay and Shared Parental Leave are all calculated based on a period of average weekly earnings. To be eligible, employees must earn at least £125 a week for 8 weeks before the 15th week of expected birth or adoption (for the full calculation, see our article on ShPP here). For the other partner in ShPP, the AWE needs to be at least £129 per week.
If a salary sacrifice contribution reduces the contracted AWE below either of these thresholds, then the employee may no longer be eligible for SMP or any of its variants. The calculation for SMP etc is on the gross contracted pay AFTER salary sacrifice has been deducted, because the agreement is a contractual reduction rather than a standard deduction like benefits in kind. This is a factor that is often overlooked by both employers and employees when agreeing to enter salary sacrifice schemes.
An employee may still be affected by a salary sacrifice agreement, even if they remain eligible for SMP etc. For the first six weeks of Statutory Maternity Pay, the employee is paid 90% of their AWE, and then either 90% of AWE or £194.32, whichever is lower. As the SalSac agreement is contractually lowering the gross pay, it is before tax and will therefore lower the 90% payment the employee will receive during the first 6 weeks and then beyond. It is likely that the employee won’t be fully aware of these ramifications when they decide to enter a salary sacrifice agreement, so communication is key to avoid any issues that may arise.
Peninsula vs Donaldson: Salary sacrifice and legacy childcare vouchers
Although only employees who entered the childcare voucher scheme before 2018 are eligible, there still may be potential issues for long-term workers entering maternity leave.
The Peninsula vs Donaldson case in 2016 ruled (after appeal) that a childcare voucher salary sacrifice scheme is not a separate benefit, but forms part of an employee’s pay, which means they are not entitled to them during maternity leave. Most employers still pay childcare vouchers anyway as part of their employee support, but it should be noted that it is not a right, and this may need to be communicated to anyone who still receives this benefit.
Statutory holiday pay
It should also be noted that statutory holiday pay cannot be sacrificed as part of a scheme. This must be calculated separately from any gross pay calculation prior to acceptance into a SalSac scheme to ensure that the statutory remuneration under Working Time Regulations is ringfenced and protected.
Communicating to employees
The mechanics of a salary sacrifice scheme are, for most employees, very confusing. Most will understand that their gross pay will be reduced, and that there are NIC and tax benefits to this, but the nuances of a scheme’s impact on their entitlements and statutory benefits won’t be understood. Payroll teams should consider this when an employee is enrolled and:
- Provide a clear, concise and simple explanation of the benefits and potential risks that enrolling on a salary sacrifice scheme might entail.
- Educate employees about their gross pay and the contractual reduction in earnings.
- Identify areas of confusion across the organisation and provide clarity where necessary.
- Include additional information about employee payslips after enrolling on a SalSac scheme.
MSP Payroll has extensive experience working with salary sacrifice and statutory payments. We can help inform communication to employees and review any assets once created. Speak to our team to find out more.
How can MSP Payroll help?
Our experts can provide comprehensive support for payroll teams calculating or processing salary sacrifice. This could include:
- A flexible hybrid outsourced payroll service to suit your requirements
- Facilitating BACs payments for your organisation to employees
- Calculating or reviewing payroll submissions before they are completed
- Consultancy support when implementing salary sacrifice
- Corrections and error support when needed
- We are specialists in all payroll regulations and provisions, including SSP, SMP, pensions, seasonal payments, PAYE and National Insurance Contributions.
Contact us here if you would like to discuss implementing payroll support.
Payroll and Salary Sacrifice: Frequently Asked Questions
Can salary sacrifice take an employee below minimum wage?
An employee is ineligible if their gross pay after contractual reduction is below £12.71 per hour, for employees aged 21 and over. This is the National Minimum Wage and must not be breached.
Does salary sacrifice affect redundancy pay calculations?
Statutory redundancy pay is calculated using the employee’s gross final contractual weekly pay. If a salary sacrifice scheme has reduced this, then it follows that the redundancy pay that the employee is entitled to is also going to be reduced.
Does salary sacrifice affect student loan payments?
The “Collection of Student Loans Manual” states that the calculation relies on the same gross pay amount that is used to work out National Insurance Contributions. A salary sacrifice scheme reduces the gross pay in consideration of NICs, so therefore will also mean the employee pays back less per pay period on their student loan for the period the scheme runs.
Other articles you may be interested in:
A guide on the changes to National Insurance on salary sacrifice pension contributions