What benefits can be provided through salary sacrifice?

Since the 2017 OpRA rules, the main benefits that still offer tax advantages through salary sacrifice are pension contributions, cycle-to-work schemes, ultra-low emission company cars, and childcare vouchers for existing scheme members. Other benefits can still be provided through sacrifice but will be taxed on the higher of the sacrifice amount or the benefit value.

Can salary sacrifice reduce my pay below minimum wage?

No. A UK salary sacrifice arrangement must not reduce your cash pay below the National Minimum Wage. If it would, the arrangement cannot be put in place. British employers must monitor this as NMW rates are updated each April.

Can I opt out of a salary sacrifice agreement?

This depends on the terms of the agreement. Most arrangements include a life events clause that allows opt-out in specific circumstances such as marriage, divorce, redundancy of a partner, or significant changes in financial circumstances. Outside of these events, the employee is typically committed for the agreed period.

How does salary sacrifice affect my pension?

If your pension contributions are calculated on your actual (post-sacrifice) salary, your pension benefits may be lower. However, if the sacrifice is for additional employer pension contributions, you may benefit from National Insurance savings on those contributions. Some employers calculate pension on the notional pre-sacrifice salary.

Does salary sacrifice affect my mortgage application?

It can. Salary sacrifice reduces your contractual salary, which is the figure many UK mortgage lenders use to assess affordability. Some British lenders will accept the pre-sacrifice salary if you can provide documentation from your employer. It is worth checking with your lender before entering a salary sacrifice arrangement, as England and Wales mortgage underwriters may treat the reduced salary as your actual income.

Is salary sacrifice the same as payroll deduction?

No. UK salary sacrifice is a contractual reduction in gross pay before tax and National Insurance are calculated. A payroll deduction is taken from net pay after tax and NI. Salary sacrifice in the United Kingdom can provide tax and NI savings for both the British employer and employee, while payroll deductions do not.

What happens if I leave the company during the agreement?

The UK agreement should specify what happens on termination of employment in England and Wales. Typically, the salary sacrifice ends, and any outstanding balance (for example, on a cycle-to-work scheme) may need to be settled from the final pay or purchased by the British employee.

EmploymentUnited Kingdom

Free Salary Sacrifice Agreement Template

Create a professional UK salary sacrifice agreement compliant with HMRC requirements. Fill in the details, preview the document, and download a PDF in minutes. This template is tailored for British employers and employees under United Kingdom employment law.

Create Your Salary Sacrifice Agreement

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SALARY SACRIFICE AGREEMENT

England And Wales · ITEPA 2003 · Finance Act 2017 (Opra) · NMWA 1998

EMPLOYER

Brightway Technologies Ltd

55 Baker Street, London W1U 8EW · Company No: 10234567 · PAYE Ref: 120/AB98765

EMPLOYEE

Emily Carter

14 Cedar Avenue, London E8 3NS · Senior Software Engineer · NI: AB 12 34 56 C

Effective: 2026-04-01

Employer Pension Contributions · £200.00 GBP per month

This Salary Sacrifice Agreement (this "Agreement") is made on 2026-04-01 between Brightway Technologies Ltd ("Employer") and Emily Carter ("Employee"). It operates as a written variation of the Employee's contract of employment pursuant to section 4 of the Employment Rights Act 1996 and constitutes an "optional remuneration arrangement" within the meaning of section 69A of the Income Tax (Earnings and Pensions) Act 2003 (as inserted by the Finance Act 2017). The parties agree as follows:

CONTRACT VARIATION AND SACRIFICE ARRANGEMENT

With effect from 2026-04-01, the Employee's pre-sacrifice contractual gross annual salary of £48,000 GBP shall be reduced by £200.00 GBP per month, giving a revised contractual gross annual salary of £45,600 GBP. The reduction is a permanent variation of contractual cash remuneration and not a deduction from salary: the Employee gives up the legal right to receive the sacrificed sum in exchange for the Benefit described at Clause 2. This effective reduction is the basis for the favourable tax treatment under ITEPA 2003 and HMRC guidance EIM42750-EIM42786.

NATURE OF THE BENEFIT

In consideration of the sacrifice, the Employer shall provide Employer Pension Contributions, being additional employer contributions into a qualifying workplace pension scheme within the meaning of the Pensions Act 2008, which remain effectively exempt under the Optional Remuneration Arrangements (OpRA) rules in Finance Act 2017 Sch 2. The Benefit shall be administered by the scheme provider Nest Corporation (National Employment Savings Trust), and the Employer may change the scheme provider on reasonable notice. Benefit details: Additional employer pension contributions of 5% of pre-sacrifice qualifying earnings paid monthly into the Nest workplace scheme, in addition to the statutory minimum.. The Employer shall make additional employer pension contributions equal to 5% of the Employee's pre-sacrifice qualifying earnings into the qualifying scheme, such that the total employer contribution is not less than the statutory minimum required under the Pensions Act 2008.

NATIONAL MINIMUM WAGE PROTECTION

The Employer confirms that, following the sacrifice, the Employee's post-sacrifice hourly rate of pay shall at no time fall below the applicable rate of the National Living Wage or National Minimum Wage prescribed under the National Minimum Wage Act 1998 and the National Minimum Wage Regulations 2015. Where a sacrifice would cause the Employee's hourly rate to fall below that level, the sacrifice shall be suspended or reduced automatically, in accordance with HMRC guidance NMWM09060. The calculated post-sacrifice hourly rate is £23.38. The Employer has verified that the post-sacrifice hourly rate remains above the applicable NLW/NMW rate.

INCOME TAX AND NATIONAL INSURANCE CONSEQUENCES

The parties acknowledge that, from the effective date, income tax and National Insurance contributions ("NIC") shall be calculated on the reduced contractual cash salary. Under the Optional Remuneration Arrangements (OpRA) rules (ITEPA 2003 Pt 3 Ch 11, as inserted by Finance Act 2017 Sch 2), the majority of benefits provided by salary sacrifice are taxable at the higher of the salary foregone and the benefit's cash-equivalent value. This Benefit is an OpRA excluded benefit and retains its full tax-advantaged treatment. Estimated annual savings: Income tax — £480 GBP. Primary Class 1 NIC — £192 GBP. These are illustrative only and depend on the Employee's personal circumstances, tax code and the prevailing HMRC rates and thresholds. The entire employer National Insurance saving is passed to the Employee as an additional pension contribution or benefit enhancement.

EFFECT ON OTHER CONTRACTUAL AND STATUTORY ENTITLEMENTS

Unless expressly stated otherwise, the following shall be calculated by reference to the post-sacrifice contractual salary: (a) any contractual bonus, commission or overtime expressed as a percentage of basic salary; (b) employer pension contributions (except those being provided as the Benefit under this Agreement); (c) death-in-service and group income protection cover (unless separately stated on a reference-salary basis). Statutory payments — including Statutory Maternity Pay, Statutory Paternity Pay, Shared Parental Pay, Adoption Pay, Sick Pay and statutory redundancy pay — shall be calculated in accordance with the relevant statutory provisions, which generally use average weekly earnings (AWE) reflecting post-sacrifice pay. The Employer draws the Employee's attention to the potential reduction in such statutory payments as a consequence of this Agreement. The Employer undertakes to make up any shortfall in statutory maternity, paternity, shared parental or adoption pay arising from participation in this sacrifice, so that the Employee is treated as if no sacrifice had been made for those periods.

DURATION AND TERMINATION

This Agreement shall take effect for 12 months from 2026-04-01 and shall end on 2027-03-31. On expiry, the Employee's cash salary shall revert to the contractual rate that would have applied absent this Agreement (subject to any annual pay review), unless a fresh salary sacrifice agreement is entered into before the expiry date. On termination of employment (for any reason) this Agreement shall terminate automatically; any outstanding benefit-provider obligations (including early-termination charges under a cycle scheme or salary-sacrifice car lease) may be recovered from the Employee's final pay to the extent permitted by s.13 of the Employment Rights Act 1996 and any applicable scheme terms signed by the Employee.

LIFESTYLE EVENTS AND VARIATION

Notwithstanding the fixed term, either party may request to vary or cancel this Agreement upon the occurrence of a lifestyle event (HMRC guidance EIM42755), including marriage or civil partnership, divorce or dissolution, birth or adoption of a child, a material change in working hours, serious illness of the Employee or a spouse/civil partner, redundancy of a spouse/civil partner, or relocation. Additional events agreed: Change of working pattern from full-time to part-time; long-term sickness absence exceeding 4 weeks. Any such variation shall be agreed in writing and take effect from the next practicable payroll date.

PENSIONS ACT 2008 — AUTO-ENROLMENT COMPLIANCE

Nothing in this Agreement shall operate to avoid, reduce or defeat any duty owed by the Employer under Part 1 of the Pensions Act 2008 (automatic enrolment) or the Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010. The Employer confirms that: (a) the Employee remains enrolled in a qualifying scheme where eligible; (b) employer pension contributions are calculated on pre-sacrifice qualifying earnings where required to meet the statutory minimum; and (c) no part of this arrangement shall be used to induce the Employee to opt out of auto-enrolment (which would contravene s.54 of the Pensions Act 2008).

HMRC COMPLIANCE AND REPORTING

The Employer shall operate this Agreement in accordance with current HMRC guidance, including EIM42750-EIM42786 and the OpRA rules in ITEPA 2003 (inserted by Finance Act 2017 Sch 2 and amended by Finance (No. 2) Act 2023). The Employer shall: (a) report the Benefit correctly on forms P11D / P11D(b) or via payrolling of benefits where registered; (b) pay Class 1A NIC on the reportable value; and (c) notify the Employee in writing if any change in legislation, HMRC guidance or scheme rules materially affects the tax or NIC treatment of this Agreement. The Employer confirms that this arrangement has been reviewed for OpRA compliance and is structured in accordance with current HMRC requirements.

10.

DATA PROTECTION

The Employer shall process personal data arising from this Agreement (including payroll, salary, NIC and benefit-provider data) in accordance with the UK General Data Protection Regulation, the Data Protection Act 2018 and the Employer's data-protection notice, on the legal bases of contract (Art. 6(1)(b) UK GDPR) and legal obligation (Art. 6(1)(c) — PAYE, NIC and pension auto-enrolment reporting). Special-category data (e.g. health information relevant to early-termination under a sickness-related lifestyle event) shall be processed under Art. 9(2)(b) UK GDPR and Sch 1 Pt 1 of the Data Protection Act 2018.

11.

EQUALITY AND REASONABLE ADJUSTMENTS

The Employer shall operate this Agreement consistently with its duties under the Equality Act 2010, including the prohibition on direct and indirect discrimination (s.19) and the duty to make reasonable adjustments (s.20). Where the operation of this Agreement would place the Employee at a substantial disadvantage because of a protected characteristic, the Employer shall consider appropriate adjustments to the terms or timing of the sacrifice.

12.

GOVERNING LAW

This Agreement shall be governed by, and construed in accordance with, the laws of England and Wales. The parties submit to the exclusive jurisdiction of the courts of England and Wales and, in respect of employment disputes, the Employment Tribunal.

13.

GENERAL PROVISIONS

Entire agreement: This Agreement, together with the Employee's contract of employment, constitutes the entire agreement between the parties in respect of the salary sacrifice arrangement. Variation: No variation shall be effective unless in writing and signed by both parties (subject to Clause 6). Severability: If any provision is found to be void or unenforceable, the remaining provisions shall continue in full force. No waiver of rights: Nothing in this Agreement waives the Employee's statutory employment rights. Counterparts: This Agreement may be executed in counterparts, each of which shall constitute an original.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date first written above.

EMPLOYER

Jennifer Walsh

HR Director

Brightway Technologies Ltd

Date: ____________________

EMPLOYEE

Emily Carter

Date: ____________________

What Is a Salary Sacrifice Agreement?

A salary sacrifice agreement is a contractual arrangement between an employer and an employee under which the employee agrees to give up part of their cash salary in exchange for a non-cash benefit. Common examples include additional pension contributions, childcare vouchers (for existing members), cycle-to-work schemes, and ultra-low emission vehicles.

For the arrangement to be effective for tax and National Insurance purposes, HMRC requires a genuine contractual change to the employee's terms and conditions. The employee's salary must actually be reduced — not simply redirected. The arrangement must be put in place before the salary is earned.

Salary sacrifice arrangements can provide tax and National Insurance savings for both the employer and the employee, making them a cost-effective way to provide workplace benefits across the United Kingdom. However, they must be properly structured and documented to achieve the intended UK tax treatment.

What's Covered in This Template

Our salary sacrifice agreement template includes all the provisions required for an HMRC-compliant arrangement.

Parties

Full details of the employer and the employee entering into the arrangement.

Effective Date

When the salary sacrifice begins, which must be before the salary is earned.

Salary Reduction

The exact amount by which the employee's gross salary will be reduced.

Benefit Provided

A clear description of the non-cash benefit the employee will receive in exchange.

Duration

The length of the arrangement and any renewal or review provisions.

Impact on Other Entitlements

How the reduced salary affects statutory payments, pension contributions, and other salary-linked benefits.

National Minimum Wage Protection

Confirmation that the sacrifice will not reduce the employee's pay below the National Minimum Wage.

Life Events Clause

Circumstances under which the employee can opt out early, such as significant life changes.

Termination Provisions

What happens to the arrangement if employment ends before the agreed period.

Employee Acknowledgement

Confirmation that the employee understands the implications and consents to the contractual change.

How to Create a Salary Sacrifice Agreement

Follow these steps to create a compliant salary sacrifice agreement using our template.

1
Identify the Benefit
Determine which non-cash benefit will be provided in exchange for the salary sacrifice. Confirm it is an eligible benefit that qualifies for favourable tax treatment under current HMRC rules.
2
Calculate the Sacrifice Amount
Work out the amount of salary to be sacrificed, ensuring the employee's remaining pay does not fall below the National Minimum Wage. Consider the impact on statutory payments and pension calculations.
3
Enter Agreement Details
Fill in the employer and employee details, the effective date, the sacrifice amount, the benefit to be provided, and the duration of the arrangement.
4
Address Impact on Other Benefits
Note how the reduced salary will affect statutory maternity/paternity pay, statutory sick pay, pension contributions, and any salary-linked benefits such as life insurance or income protection.
5
Review and Sign
Preview the completed agreement, verify all terms, and download as a PDF. Both parties must sign before the arrangement takes effect. The agreement must be in place before the salary is earned.

Legal Considerations

Salary sacrifice arrangements must comply with HMRC requirements and employment law.

This template is for informational purposes only and does not constitute legal advice. Consult a qualified solicitor for advice specific to your situation.

Reviewed for England & Wales law

HMRC Requirements

For a UK salary sacrifice to be effective, there must be a genuine change to the contractual terms of employment. The employee must agree to a lower salary before the salary is earned. If the employee retains the right to receive the original salary, HMRC will not recognise the arrangement and the full salary will be taxable under British tax law. The arrangement must be documented in writing.

National Minimum Wage

A salary sacrifice must not reduce the employee's cash pay below the UK National Minimum Wage. If the sacrifice would breach the NMW floor, the arrangement cannot proceed for that employee. Employers in England, Scotland, and Wales must check each employee's position individually and monitor compliance as NMW rates change annually.

Optional Remuneration Arrangements

Since April 2017, the UK optional remuneration arrangements (OpRA) rules mean that most benefits provided through salary sacrifice are taxed on the higher of the amount sacrificed or the taxable value of the benefit. Key exemptions under United Kingdom tax rules that still offer tax advantages include pension contributions, cycle-to-work schemes, ultra-low emission cars, and childcare vouchers for existing members.

Impact on Statutory Payments

Because salary sacrifice reduces the employee's contractual pay, it can affect the calculation of UK statutory payments including Statutory Maternity Pay, Statutory Paternity Pay, and Statutory Sick Pay. British employers should make employees aware of this impact before they enter into the arrangement. Some employers choose to calculate these payments on the pre-sacrifice salary as a matter of policy.

Frequently Asked Questions

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