Salary sacrifice schemes look simple on paper. Reduce the salary, provide the benefit, process the payroll on the lower figure. What is there to get wrong?
Quite a lot, as it turns out.
After years of working with businesses across a wide range of sectors, Paul Chappell, our Head of Legislation and Compliance, has seen compliance failures that have resulted in criminal liability, employment tribunal claims, and five-figure HMRC penalties – all stemming from avoidable mistakes. Here are the five that come up most often.
Mistake 1: Breaching National Minimum Wage
This is the most serious and the most common. Salary sacrifice cannot reduce an employee’s pay below the National Minimum Wage for their age bracket. Not by a penny. The current rates from April 2026 are £12.71 per hour for those aged 21 and over, £10.85 for 18 to 20, and £8.00 for under-18s and apprentices.
The problem is rarely that employers set this up incorrectly at the start. It is that they set it up, do not review it, and then NMW rates increase every April, and maybe something as innocuous as a salary sacrifice benefit suddenly puts the employee under the rate.
Consider an employee like Ayaz
- 23 years old
- Working 37.5 hours per week
- Earning £25,000 a year.
- His hourly rate works out at £12.82, just £0.11 above the National Living Wage.
- He wants to join the cycle to work scheme at £40 per month. After sacrifice, her hourly rate drops to £12.57 – below the threshold.
- The sacrifice cannot go ahead.
That scenario plays out across the UK every April. Employers who built schemes without annual review triggers find themselves in inadvertent breach.
The consequences are serious. Paying below NMW is a criminal offence. Employee consent is irrelevant – the employer is liable regardless. HMRC can impose penalties of up to 200% of the underpayment and will name and shame the business publicly.
The fix is straightforward –
- Calculate NMW compliance before every sacrifice
- Build in at least a 5% safety margin
- Review all arrangements every April when the new rates come in.
- Automatic alerts when pay approaches the threshold are worth implementing if your payroll system supports them.
Mistake 2: Not telling employees about the impact on statutory payments
Salary sacrifice reduces gross pay. Statutory Maternity Pay, Statutory Sick Pay, Statutory Paternity Pay, Statutory Adoption Pay – all of these are calculated on gross pay.
An employee who has been sacrificing into a pension scheme for two years, and then goes on maternity leave, may find their SMP is significantly lower than they expected.
Let’s look at Sophie;
- She is earning £40,000 and sacrifices £5,000 per year for pension contributions
- Reducing their gross to £35,000
- Without sacrifice, their total SMP would be £10,223.85
- With the sacrifice reducing average weekly earnings, total SMP comes to £9,706.61 – a reduction of over £500.
At a time when that employee is looking at a reduced household income, the discovery that no one told them about this is not going to go well.
The consequence of failing to disclose this is potential financial hardship for the employee and a real risk of tribunal claims. Employees must understand the full picture before they agree to the arrangement – not after they need the statutory payment.
The three options available to employers are:
- Allowing sacrifice to be suspended during maternity and other family leave
- Maintaining a notional pre-sacrifice salary for statutory payment calculations (which requires careful contractual drafting)
- Ensuring employees receive written calculations showing the potential reduction before they sign.
Ideally, all three would be options.
Mistake 3: Assuming all salary sacrifice still provides a tax advantage
Since April 2017, Optional Remuneration Arrangement (OpRA) rules have changed how most benefits under salary sacrifice are taxed. Under OpRA, the taxable value of a benefit is the higher of the amount sacrificed or the normal benefit-in-kind value. For most benefits, this largely or entirely removes the tax advantage.
Benefits caught by OpRA include
- Private medical insurance
- Gym memberships
- Company cars with CO2 emissions above 75g/km
If an employee sacrifices £4,800 per year for a diesel company car with a BIK value of £8,400, they are taxed on the £8,400 – the higher figure. The sacrifice provides no income tax saving.
The benefits that remain exempt from OpRA are;
- Registered pension contributions
- Cycle to work
- Ultra-low emission vehicles – specifically those with CO2 emissions of 75g/km or less, which covers all electric vehicles.
The mistake happens when employers introduce or retain salary sacrifice schemes for OpRA-caught benefits without realising the tax advantage has been eliminated. Employees believe they are receiving a tax-efficient perk; they are not. The scheme is delivering complexity without the benefit.
Before implementing any salary sacrifice arrangement outside pensions, EVs, or cycle to work, calculate whether OpRA applies and whether the numbers still stack up.
Mistake 4: Poor documentation
HMRC’s position is clear – if the documentation does not support the arrangement, the arrangement is not valid. That means back-dated tax and NIC charges for all parties, potentially covering multiple years.
Every salary sacrifice arrangement needs a written agreement signed by both the employer and employee. It must specify the original gross salary, the reduced salary, the exact benefit being provided, the duration of the arrangement, and the circumstances under which it can be varied or ended. A generic template that does not reflect the actual arrangement, or an informal email exchange, will not hold up.
Signed copies should be retained for at least six years. Contracts must be updated when arrangements change – when the benefit changes, when the employee’s salary changes, or when NMW compliance requires a reduction in the sacrifice amount.
Documentation is not bureaucracy for its own sake. It is the thing that protects the scheme from challenge.
Mistake 5: Locking employees into arrangements they cannot exit
Salary sacrifice arrangements require commitment, and there are good reasons why providers and employers set minimum periods. For a cycle-to-work scheme, the hire period is typically 12 to 18 months. For a pension arrangement, continuity matters.
The problem arises when those arrangements do not include exit provisions for major life events, or when employees are locked in for two to three years without any review opportunity.
An employee who enters a long-term sacrifice arrangement and then becomes pregnant, faces redundancy, or receives a pay cut may find themselves in genuine financial difficulty – and with no straightforward way out. That damages the employment relationship and, in some cases, triggers legal action.
The fix is to limit commitments to 12 months with an annual review, include break clauses for family leave, redundancy, and NMW proximity, and allow sacrifice to be suspended where circumstances genuinely require it. The flexibility needs to be written into the contract, not applied informally case by case.
The underlying principle
Every one of these mistakes has the same root cause – salary sacrifice was treated as a set-and-forget administrative task rather than a compliance arrangement that needs active management. It is not set-and-forget. It requires annual reviews, clear documentation, properly informed employees, and payroll systems that can apply the rules correctly.
Done well, it remains one of the most effective tools available for reducing employment costs while genuinely improving what employees receive. Done poorly, it creates exactly the kind of liability that professional advice at the outset would have cost a fraction of.
If you are reviewing your current salary sacrifice arrangements, or setting them up for the first time, we can help you get it right from the start.
