Salary Sacrifice in 2026-27: Where It Still Works

Salary sacrifice is simple in principle. An employee gives up part of their cash salary in return for a non-cash benefit. For certain benefits, the tax and National Insurance on the salary given up goes with it. For others, the rules now claw most of that saving back.

Two changes have shifted the maths. From 6 April 2025, employer National Insurance rose to 15% and the secondary threshold fell to £5,000. From 6 April 2026, dividend tax rates went up. Together they change where salary sacrifice earns its keep.

The headline is reassuring. The strongest schemes are still strong. But the rules have always drawn a sharp line between benefits that keep the advantage and benefits that do not, and that line is where this post spends its time.

Who this applies to

• SME employers running or considering salary sacrifice schemes.
• Owner-managers weighing pension contributions against dividend extraction.
• Directors of close companies reviewing benefit packages for 2026-27.
• Employees deciding whether a workplace scheme is worth taking up.

The rule that decides everything: OpRA

Since April 2017, most salary sacrifice arrangements have been caught by the optional remuneration arrangement (OpRA) rules. Under OpRA, the employee is taxed on the higher of the cash given up or the taxable value of the benefit. That removes the income tax advantage for most benefits.

There are four exceptions. Pension contributions, Cycle to Work, ultra-low emission cars (CO2 of 75g/km or less), and employer-provided childcare are exempt from OpRA. These keep the full tax and National Insurance saving.

That single distinction explains almost everything that follows. If a benefit is on the exempt list, salary sacrifice still works. If it is not, the saving is now mostly down to employer National Insurance alone.

Where it still works strongly

Pension contributions

Pension salary sacrifice remains the most valuable option for most people. The salary you sacrifice is not taxed as employment income, the employer pension contribution is made gross, and no employee or employer National Insurance is due on the amount given up. The employer National Insurance saved is now 15% rather than the old 13.8%. The pension annual allowance and the usual pension rules still apply.

There is one change on the horizon. From 6 April 2029, only the first £2,000 of employee pension contributions made through salary sacrifice each year will be exempt from National Insurance, with NIC applying above that for both employer and employee. Income tax relief is unchanged. The point for 2026-27 is straightforward: the cap is years away, and pension sacrifice remains strong now.

For owner-managers, the dividend rise sharpens the case. With basic-rate dividend tax at 10.75% and higher-rate at 35.75% for 2026-27, routing profit into a pension rather than extracting it as a dividend looks better than it did a year ago.

Electric company cars

Electric cars are exempt from OpRA, so the employee is taxed on the benefit value, not the salary given up, and that benefit value is tiny. The company car benefit-in-kind rate for a fully electric car is 4% in 2026-27, against 25% or more for many petrol or diesel cars.

The rate does rise: 5% in 2027-28, 7% in 2028-29, then 9% in 2029-30. Even at 9%, an electric company car through salary sacrifice remains one of the most tax-efficient benefits available. Strong now, still strong across the trajectory.

Cycle to Work

A Cycle to Work scheme is exempt from OpRA and remains fully effective. The employee saves income tax and National Insurance on the sacrificed amount, and the employer saves 15% National Insurance. Modest in size, but clean and uncomplicated.

Where it is now closer to neutral

Benefits outside the exempt list are caught by OpRA, so the income tax saving largely disappears. What remains is the employer National Insurance saving and the convenience of the scheme.

Holiday purchase lets employees buy extra annual leave by giving up pay. It is not a taxable benefit in the usual sense, but the personal saving is small once income tax neutrality applies, and the employer NIC saving is the main remaining benefit.

Gym membership is a taxable benefit caught by OpRA. The employee is taxed on the higher of the cash given up or the benefit value, so the income tax advantage is gone. It can still be a valued perk, but as a tax play it is close to neutral.

These schemes are not pointless. They are just no longer a tax win, and they should be offered on their merits, not sold as a saving they no longer deliver.

Scheme by scheme for 2026-27

Scheme	OpRA status	Employee income tax saving	Employer NIC saving (15%)	Verdict
Pension contributions	Exempt	Yes	Yes	Still strong (NIC cap from April 2029)
Electric company car (≤75g/km)	Exempt	Yes, taxed on low BIK	Yes	Still strong
Cycle to Work	Exempt	Yes	Yes	Still strong
Holiday purchase	Caught	Minimal	Yes	Closer to neutral
Gym membership	Caught	No	Yes	Closer to neutral

Worked example

Assumptions. Sam earns £50,000 and is a higher-rate taxpayer in part. His employer offers pension salary sacrifice. Sam sacrifices £5,000 of salary into his pension for 2026-27.

Employee saving. On £5,000 sacrificed, Sam saves income tax and employee National Insurance. The £5,000 goes into his pension gross, with no tax or NIC deducted on the way in.

Employer saving. The employer no longer pays 15% National Insurance on that £5,000, saving £750. Employers often pass some or all of this back into the employee's pension, increasing the contribution further.

The dividend comparison. If Sam were a director taking that £5,000 as a dividend instead, it would suffer dividend tax at 35.75% in the higher band for 2026-27, leaving him far less. Sacrificing into the pension keeps the full amount working. Same money. Better destination. Lower tax.

Lexmore's View

The 2025 and 2026 changes did not break salary sacrifice. They sharpened it. The schemes that were always the strongest, pensions, electric cars and Cycle to Work, still deliver, and the higher employer National Insurance rate has made the employer-side saving larger.

The honest caveat is the OpRA line. If a scheme is not on the exempt list, treat it as a benefit your people might value, not a tax saving, because the income tax advantage is gone. And keep the April 2029 pension NIC cap in view for long-term planning, while making full use of the relief that is available now. Some exempt salary sacrifice benefits can avoid P11D reporting when structured correctly, but company cars and other taxable benefits need separate payroll or P11D treatment.

References

• GOV.UK, Rates and allowances: National Insurance contributions
• HMRC, Employment Income Manual EIM44000: optional remuneration arrangements
• GOV.UK, Taxable benefits in kind: company car tax rules 2025 to 2028
• GOV.UK, Cycle to Work scheme implementation guidance
• ICAEW, Budget: NIC saving on salary sacrifice pension contributions capped