Salary sacrifice and the National Minimum Wage

A genuine salary sacrifice reduces the worker’s contractual pay, and the benefit received in exchange does not count as pay for minimum wage purposes. So the cash pay left after every sacrifice must still meet the National Minimum Wage or National Living Wage for the hours worked in each pay reference period. HMRC expects employers to have a procedure that caps sacrifices to keep pay at or above the minimum.

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This page looks at the minimum wage side of salary sacrifice in detail: why the rules bite, how to test each worker, what to do when the rates rise each April, and what happens if a sacrifice has already caused an underpayment. For the general minimum wage rules, see National Minimum Wage rules for employers.

Why can a salary sacrifice take pay below the minimum wage?

HMRC’s National Minimum Wage Manual at NMWM09300, which applies regulation 9 of the National Minimum Wage Regulations 2015, explains that where a genuine salary sacrifice is in place the worker is no longer entitled to that part of their pay under the contract. The sacrificed amount is therefore left out of the worker’s remuneration when minimum wage pay is calculated.

Whatever the worker gets in return is looked at separately, and in most cases it does not help. The government’s guidance, Calculating the minimum wage, says benefits in kind do not count towards minimum wage pay, even if they have a monetary value and whether or not they are taxable. The only benefit with special treatment is living accommodation, through the accommodation offset. So a pension contribution, a bicycle, childcare vouchers or a car provided through salary sacrifice adds nothing to minimum wage pay, while the salary given up for it comes off.

The guidance also says that where a worker has more than one arrangement, each additional sacrifice reduces their minimum wage pay further. Examples it lists include company cars, childcare vouchers, work related training, cycle to work schemes, car parking near the workplace and additional pension contributions.

What does HMRC’s salary sacrifice guidance say?

HMRC’s guidance for employers, Salary sacrifice for employers, states that a salary sacrifice arrangement must not reduce an employee’s cash earnings below the National Minimum Wage rates, and that employers must put procedures in place to cap salary sacrifice and make sure the rates are maintained. This is a separate test from the tax rules. A sacrifice can be perfectly effective for tax and still cause an underpayment of the minimum wage. For how the tax side works, see salary sacrifice and optional remuneration rules.

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How is minimum wage pay tested?

The test is applied separately for each pay reference period. Under the government guidance, this is the period for which the worker is paid, up to a maximum of one calendar month: a week for a weekly paid worker, two weeks for a fortnightly paid worker and so on. The worker must be paid, on average, at least the minimum wage for all the hours worked in that period.

The rates from 1 April 2026 are:

Worker	Hourly rate from April 2026
Aged 21 and over (National Living Wage)	£12.71
Aged 18 to 20	£10.85
Under 18	£8.00
Apprentice rate	£8.00

When working out pay for the test, start from the cash pay after the sacrifice. Some elements of pay are excluded anyway, such as the premium element of overtime pay and most allowances that are not consolidated into standard pay, so a worker with a high gross figure made up of premiums can have less headroom than it appears.

Is it a sacrifice or a deduction?

The label used by the employer does not decide the question. The guidance says the position depends on how the arrangement actually operates, and employers often describe arrangements as “salary sacrifice” when they are really deductions from pay. That distinction affects the result:

A genuine sacrifice reduces contractual pay, so it always reduces minimum wage pay.
A deduction is tested under the deductions rules. Deductions for the employer’s own use and benefit reduce minimum wage pay, and so do deductions for goods or services bought from the employer.
Some deductions do not reduce minimum wage pay, for example deductions for the worker’s own liabilities that the employer passes on to a third party, such as a trade union subscription or childcare fees paid to an outside nursery on the worker’s behalf.

HMRC’s manual at NMWM09300 says it is important to identify the true nature of every payment and deduction in a salary sacrifice scheme and to test the evidence with all parties.

How should an employer check a sacrifice before agreeing it?

Illustration only. A worker aged 25 is paid weekly for a fixed 40 hour week at £13.50 an hour, so £540 a week. The National Living Wage for those hours is £12.71 × 40 = £508.40. The headroom is £31.60 a week.

A requested sacrifice of £50 a week would leave cash pay of £490, an average of £12.25 an hour. That is below the National Living Wage, so the sacrifice cannot go ahead at that level.
A sacrifice of up to £31.60 a week keeps the worker compliant in a normal week, but leaves nothing spare for the next rate rise or for a week with extra hours at basic pay.

A practical check for each applicant is:

Identify the worker’s pay reference period and normal hours, including working time that is easily missed, such as training and business travel time.
Calculate minimum wage pay for that period at the worker’s rate band.
Take the contractual pay after all existing sacrifices and any deductions that reduce minimum wage pay.
Limit the new sacrifice to the difference, keeping a margin for the next April increase.
Build the cap into payroll so that if hours rise or pay falls in a period, the sacrifice is reduced rather than pay dropping below the minimum.

What happens when the rates rise each April?

The rates change on 1 April each year, and the guidance says an increase applies from the first pay reference period starting on or after the change. A sacrifice that was safe in March can become an underpayment in April. This is a particular risk with long fixed term arrangements such as car or cycle schemes, because HMRC’s Employment Income Manual at EIM42767 accepts that a variation lasting 12 months or more is not taxed as convertible into cash, so most schemes fix the sacrifice for a year or longer.

HMRC’s employer guidance allows a salary sacrifice to be changed where a lifestyle change significantly alters the employee’s finances, such as marriage, divorce or a partner becoming redundant or pregnant. A rate rise is not on that list, so the safer approach is to agree the cap at the outset with enough headroom, and to write into the agreement that the sacrifice will be reduced if needed to keep pay at the minimum wage.

What if a sacrifice has already caused an underpayment?

The employer must pay the arrears. Under the government guidance, arrears are worked out at the current rate for the worker’s age band if that is higher than the rate at the time, so the amount due grows as rates rise. HMRC enforces the minimum wage on behalf of the Fair Work Agency. If it issues a notice of underpayment, the penalty can be up to 200% of the arrears, capped at £20,000 per worker, halved if the notice is fully complied with within 14 days.

An employer that finds the problem itself can pay the arrears and use HMRC’s voluntary declaration process. The guidance says that, other than in exceptional cases, arrears declared and accepted in this way do not lead to public naming or financial penalties. If the underpayment also affects tax or National Insurance calculations for earlier years, see correcting payroll errors from earlier years.

What records should the employer keep?

Employers must keep records sufficient to show that each worker was paid at least the minimum wage in every pay reference period, and must be able to produce them for one worker and one period in a single document. Since 1 April 2021 these records must be kept for at least 6 years. For salary sacrifice, that means keeping the signed variation of contract, the agreed amount and duration, payslips before and after the change, and the calculation showing the cap.

A worker who believes they have been underpaid can ask in writing to see their records, and the employer must produce them within 14 days or an agreed period. If the employer fails to do so, an employment tribunal can award the worker 80 times the hourly minimum wage rate.

Other pay linked effects of a sacrifice, such as on statutory payments or auto enrolment contributions, are explained on our page on salary sacrifice schemes.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.