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Note: From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages reduced from 12% to 10%. From 6 April 2024, that rate is reduced further to 8%, the main rate of self-employed class 4 NIC is reduced from 9% to 6% and class 2 NIC is no longer due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. We will include these changes with our updates in the next few weeks.

Updated on 6 April 2024

NIC on employment benefits and other payments

On this page, we look at how NIC is charged on employment benefits (sometimes called benefits-in-kind) and other payments you receive from your employer other than your normal salary or hourly wage.

a person balancing yellow blocks on their finger, the blocks each have a letter written on them together spelling the word 'BENEFITS'
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Content on this page:

Introduction

Normally, employees do not pay class 1 NIC on benefits and expenses they receive from their employer – for example, a company car or an interest-free loan. Instead, the employer may have to pay class 1A NIC on the benefit.

There are some exceptions to this. For example, if you receive a benefit at can be substituted or sold for a cash equivalent then class 1 NIC may be payable.

Furthermore, if a benefit provided is not chargeable to income tax, then neither class 1 nor class 1A NIC is due on the benefit in kind. This includes things such as private pension contributions made by an employer. You can read more about income tax on employment benefits on our page Employment benefits.

Example: employer loans

If your employer makes you a low-interest or interest-free loan, you do not have to pay class 1 NIC on the cash equivalent of the benefit. Instead, your employer may have to pay class 1A NIC on the taxable benefit. In this case the benefit is the difference between the annual interest charged (if any), and the annual amount that would be charged at HMRC’s official rate of interest (see GOV.UK).

If your employer writes off or waives the loan, then the loan will be treated as a cash payment to you and will be taxable just like a normal cash payment (for example, a bonus). This is because your employer has let you keep the money loaned. At the point the loan is written off, your employer will therefore need to deduct class 1 NIC and income tax from your other wages through the payroll, based on the value of the loan that has been written off.

On GOV.UK, you can use the A to Z list of expenses and benefits to see the tax and NIC treatment of any benefits your employer gives you. Although this is aimed at employers, it may also be useful to employees.

Salary sacrifice arrangements

Your employer may offer a salary sacrifice scheme that enables you to swap cash salary for non-cash benefits. You cannot participate in salary sacrifice schemes where your pay would be reduced below the national minimum or living wage.

Non-taxable benefits

If the benefits you receive under a salary sacrifice scheme are not liable to tax and/or NIC (for example, employer pension contributions) then you can be in a better position overall than if you merely purchased the benefit from your net (after tax and NIC) salary.

Example – salary sacrifice of a non-taxable benefit

James’ current contract provides for cash pay of £15,000 a year with no benefits. If James puts £500 of this into a pension, then tax will only be due on £14,500 but NIC will still be due on the £15,000.

Under salary sacrifice, James agrees with his employer that for the future he will be paid cash remuneration of £14,500 a year and that his employer will put £500 into James’ pension, tax and NIC free. This means that James’ tax and NIC will only be charged on £14,500. The employer does not have to pay employer’s NIC on the £500 cash given up either.

Taxable benefits

Generally, any salary that is given up in exchange for taxable benefits remains liable to tax and NIC (with no additional tax charge arising in connection with the benefit obtained in exchange), unless the cost to the employer is more than the salary given up: in that case, the higher value is used.

Example – salary sacrifice of a taxable benefit

If an annual gym membership is normally £500 an employer might manage to negotiate that the cost it would pay per employee would be £400. The employer then offers that if employees give up (‘sacrifice’) £350 of pay, they will buy the employees a gym membership. Any employees who take up the offer would be taxed on £400 (the cost to the employer) as it is higher than the value of salary sacrificed (£350).

Low earners

If you are a low earner, the advantages of salary sacrifice arrangements can be limited. If you normally earn employment income between the lower earnings limit (£123 per week in 2024/25) and the earnings threshold (£242 per week in 2024/25), you do not pay class 1 NIC anyway, so switching from cash to a non-cash benefit will not save class 1 NIC for you.

If the salary sacrifice reduces your earnings below the lower earnings limit, you could be in a worse position. If this happens, you do not pay class 1 NIC, but your NIC record is not credited. This means that you might lose entitlement to contributory benefits and the state pension, unless you receive NI credits in another way, or have another employment/self-employment which separately gains you a qualifying year. 

Example: salary sacrifice

Kerry earns £195 per week. Her employer suggests a salary sacrifice scheme whereby she gives up cash salary in exchange for a pension contribution. The amount sacrificed is to be £55 a week.

If she exchanges £55 of cash salary for £55 of pension contributions each week, she will have cash earnings of £140 per week. That would still leave her in the bracket where she would be treated as paying NIC at a zero rate. However, if she sacrificed a further £20 per week of her salary to get additional pension contributions made on her behalf, that will take her earnings below the lower earnings limit and outside the NIC system. This could adversely affect Kerry’s entitlement to contributory benefits, statutory maternity pay, statutory sick pay, and statutory adoption pay and also her state pension entitlement.

Kerry could be entitled to some NIC credits instead, that might give entitlement to some benefits, but she would have to review the position carefully.

Her employer might also be in breach of the national minimum wage rules.

If you are a low paid worker in a ‘relief at source’ pension scheme, also see our pensions guidance for more information on salary sacrifice and a warning about entering a salary sacrifice pension scheme.

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