Salary Sacrifice and Minimum Wage 2026/27

Why NMW matters for salary sacrifice

Salary sacrifice is a change to your contractual salary, agreed between you and your employer. It is not simply a payroll deduction — it genuinely reduces the salary you are entitled to. HMRC is clear that salary sacrifice cannot reduce an employee's pay below the National Minimum Wage for any pay reference period.

This distinction matters because:

• Tax deductions (income tax, NI) do not count for NMW — these come out of pay after NMW is assessed.
• Salary sacrifice does count — it reduces the cash pay before NMW is assessed.
• If a sacrifice takes cash pay below NMW, the employer is in breach of the National Minimum Wage Act, which can result in penalties.

It is the employer's legal responsibility to check NMW compliance. However, as an employee it is worth understanding whether you are at risk before agreeing to any sacrifice.

National Minimum Wage 2026/27

The National Living Wage (for workers aged 21 and over) for 2026/27 is £12.21 per hour. Lower rates apply for younger workers and apprentices. Rates are reviewed annually — always check the current rates at GOV.UK as they may have changed.

Worked example

Employee earning close to NMW

Consider an employee aged 21+, working 37.5 hours per week, earning £23,000 per year.

• Annual hours: 37.5 × 52 = 1,950
• Effective hourly rate: £23,000 ÷ 1,950 = £11.79/hr
• NMW 2026/27: £12.21/hr

At £11.79/hr this employee is already below the 2026/27 NMW — which means either the salary is not compliant, or there are additional pay elements (such as commission or allowances) that bring it above NMW when included.

In any scenario where the effective hourly cash rate is at or near £12.21/hr, salary sacrifice is not possible — the arrangement would push the rate below the legal minimum. Even a small pension sacrifice would be blocked.

For an employee on exactly NMW: any sacrifice at all is blocked unless their contract includes pay elements outside the sacrifice agreement.

Who is most commonly affected

This limitation most commonly affects:

• Lower-paid workers whose salaries are close to the NMW threshold.
• Part-time workers where the hourly rate may not look low but total sacrifice would breach the threshold for a pay period.
• Seasonal or variable-hours workers where pay fluctuates across reference periods.
• Young workers on the lower NMW/NLW rates (though these rates are lower, the principle is the same).

If you think you may be affected, ask your employer's payroll team to check before agreeing to any sacrifice.

Employer responsibilities

It is the employer's legal duty to ensure salary sacrifice does not cause NMW non-compliance. A compliant employer will:

• Check each employee's hourly equivalent pay before setting up a sacrifice.
• Review compliance each pay period, particularly where hours vary.
• Tell you if your salary means you cannot participate in a scheme — or can only participate up to a lower limit.

If an employer does allow a sacrifice that causes NMW non-compliance, HMRC can enforce back-payment and issue financial penalties. Employees who believe their rights have been breached can contact ACAS or raise a complaint through HMRC's NMW team.

Common mistakes

• Confusing take-home pay with contractual pay. NMW applies to contractual cash pay, not what you receive after tax deductions.
• Assuming the employer has checked. Not all employers verify this rigorously. If you are near NMW, ask explicitly before signing.
• Thinking holiday pay or overtime avoids the issue. Different pay elements are treated differently for NMW purposes — your employer should calculate this correctly.
• Joining a scheme mid-year after a pay change. A new lower salary or reduced hours could push you below the threshold even if you were previously fine.

Frequently asked questions

Official sources

• GOV.UK — Salary sacrifice and the effects on PAYE
• GOV.UK — National Minimum Wage rates
• GOV.UK — National Insurance rates and letters