Salary sacrifice lets staff swap part of their pay for a benefit such as extra pension contributions, a bike or a company car. It can save tax and National Insurance, but it lowers their contractual pay, and that can take them below the National Minimum Wage. This plain-English guide explains how salary sacrifice works, what HMRC looks at and how to check you stay compliant. It is based on HMRC's September 2026 webinar "Salary sacrifice and the National Minimum Wage", with links to the official guidance at the end.
It is an agreement to reduce an employee's entitlement to cash pay, usually in return for a non-cash benefit. You change the employment contract, and the employee must agree to it.
For the minimum wage it does not matter whether something is treated as a gross or net deduction, or how it is taxed. The only question is whether the worker's contractual pay has been reduced, or whether an amount is being deducted from their pay.
Once pay is sacrificed, the new lower contractual pay is the pay used for the minimum wage. If it falls below the rate, the worker is underpaid straight away, and each extra sacrifice reduces it further.
If a pension salary sacrifice would take a worker below the minimum wage, you can still auto-enrol them and take their contributions another way, as a deduction, without changing their contractual pay.
Underpayments usually happen after the first check: when hours change, extra sacrifices are added or staff work more than their average hours. Check each pay reference period using actual hours worked, not averages.
Salary sacrifice does not appear in the minimum wage legislation, but HMRC's minimum wage guidance treats it as a reduction in pay rather than a deduction from pay. Where a worker has given up part of their contractual pay, they are no longer entitled to it, so their pay for the minimum wage is reduced accordingly.
The minimum wage check is always the same: pay for the period divided by hours for the period. These examples from the webinar use the 2026/27 rate of £12.71 an hour for workers aged 21 and over.
Sabrina's salary after her sacrifice is £20,400 for 2,088 basic hours a year, paid monthly.
Asma, 30, earns £27,500 and sacrifices 10% into her workplace pension, leaving £24,750 for 1,920 hours a year.
James, 32, earns £30,000 and sacrifices £1,200 a year for a cycle to work bike, leaving £28,800. That is £2,400 a month for about 160 hours, or £15.00 an hour. He then asks to sacrifice another £600 a month into his pension.
Keep his contractual pay at £2,400 and deduct the pension contribution from pay. The deduction is passed to the pension provider on his behalf, so the employer gets no use or benefit from it and it does not reduce his minimum wage pay.
Agree a lower salary sacrifice that keeps his new contractual pay at or above the minimum wage for the hours he actually works.
James's hours aren't set in his contract, so his employer used an average of 37 hours a week. If he works more hours in a month, his real hourly rate falls. Always use the hours actually worked.
Many employers think they have no choice about auto-enrolment contributions. You must enrol eligible workers, but you do not have to use salary sacrifice. The Pensions Regulator says that where a worker can't use salary sacrifice, you must still auto-enrol them and use an alternative way of taking their contributions.
From April 2029, only the first £2,000 a year of employee pension contributions made through salary sacrifice will be exempt from National Insurance. Above that, both employer and employee National Insurance will apply. Income tax relief is unaffected, employer pension contributions stay free of National Insurance, and employers can still offer salary sacrifice above the cap.
Offering salary sacrifice or thinking about it? We can check your arrangements against the minimum wage, set them up correctly in payroll and review them each pay period.
Talk to us about payrollThis guide is general information based on HMRC's published guidance and webinar, and is not advice for your specific circumstances. Rules change, so check the official guidance or speak to us before acting.