Salary sacrifice tax treatment is how tax and national insurance apply when an employee gives up part of their salary for a non-cash benefit. The sacrificed pay is not taxed as earnings, which can reduce income tax and national insurance on that amount.
In one line: Salary sacrifice tax treatment sets how giving up pay for a benefit affects income tax and national insurance.
How salary sacrifice tax treatment works
Under a salary sacrifice arrangement, the employee's contractual pay is reduced in exchange for a benefit such as pension contributions or a cycle scheme. Tax and national insurance are then assessed on the lower salary.
An employee earning 35,000 GBP who sacrifices 3,000 GBP into a pension is taxed on 32,000 GBP. They save income tax and national insurance on the 3,000 GBP, and the employer often saves national insurance too.
Some benefits, including most cars and many perks, fall under optional remuneration rules that tax the higher of the salary given up or the benefit value, removing the saving in those cases.
Salary sacrifice vs a benefit in kind
A standard benefit in kind is given on top of salary and taxed as extra value. Salary sacrifice swaps cash pay for the benefit, changing the salary itself before tax is calculated.
Pension contributions and cycle schemes usually keep their saving, while cars and other items caught by optional remuneration rules are taxed much like an ordinary benefit in kind, neutralising the advantage.
Primary source: GOV.UK: Salary sacrifice for employers