For the 2026/27 UK tax year, an employee agrees to sacrifice part of their salary in exchange for an increased employer pension contribution, under a salary sacrifice arrangement set up through a contractual variation. Which statement correctly describes the National Insurance effect of this arrangement, as it applies for 2026/27?
- Salary sacrifice has no effect on National Insurance for either the employee or the employer, because National Insurance is always calculated on the employee's original contractual salary regardless of any sacrifice
- Only the employer saves National Insurance on the sacrificed amount; the employee's own National Insurance liability is unaffected because it is based on gross contractual pay agreed at the start of employment
- Because the sacrificed amount is removed from the employee's gross pay before National Insurance is calculated, both the employee and the employer pay National Insurance on a lower amount, reducing the employee's Class 1 liability and the employer's Class 1 secondary liability on the sacrificed portion
- Salary sacrifice arrangements are only recognised by HMRC for National Insurance purposes when the employee's income is above the Upper Earnings Limit; sacrificing salary below that limit has no National Insurance effect
Why C? And why not the others?
Correct answer: C. Because the sacrificed amount is removed from the employee's gross pay before National Insurance is calculated, both the employee and the employer pay National Insurance on a lower amount, reducing the employee's Class 1 liability and the employer's Class 1 secondary liability on the sacrificed portion
A valid salary sacrifice arrangement contractually reduces the employee's cash earnings before National Insurance is worked out, so the sacrificed amount falls outside the earnings on which both the employee's Class 1 contributions and the employer's Class 1 secondary contributions are calculated, meaning both parties pay National Insurance on a lower figure than before the sacrifice, exactly as the correct option describes. The option claiming no effect on either party is wrong because the whole point of a valid sacrifice, given effect through a genuine contractual variation, is to reduce the cash earnings that both employee and employer National Insurance are charged on. The option claiming only the employer benefits is wrong because the employee's own Class 1 liability is calculated on the same reduced post-sacrifice earnings, so the employee's National Insurance also falls. The option restricting the effect to earnings above the Upper Earnings Limit is wrong because salary sacrifice reduces the National Insurance base at whatever earnings level the sacrifice occurs; it is not gated behind any particular earnings threshold.
Source: GOV.UK: Salary sacrifice and the effects on PAYE