Updated on 6 April 2026

National Insurance on employment benefits and other payments

On this page, we look at how National Insurance 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 National Insurance 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 National Insurance on the benefit.

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

Furthermore, if a benefit provided is not chargeable to income tax, then neither class 1 nor class 1A National Insurance 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 exceeding £10,000, you do not have to pay class 1 National Insurance on the cash equivalent of the benefit. Instead, your employer will have to pay class 1A National Insurance 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). Note that loans of less than £10,000 are usually exempt. There are some other exemptions too, which you can read about on GOV.UK.

If your employer writes off or waives the loan (of any value), 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 National Insurance from your other wages through the payroll, based on the value of the loan that has been written off. For income tax purposes, the value of the loan written off is included on a form P11D as a benefit in kind.

On GOV.UK, you can use the A to Z list of expenses and benefits to see the tax and National Insurance 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 National Insurance (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 National Insurance) salary.

Example – salary sacrifice of a non-taxable benefit

James’ current contract provides for cash pay of £15,000 plus employer pension contributions, provided James also contributes to his pension. If James puts £500 of this into a net pay pension, then tax will only be due on £14,500 but National Insurance 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 an extra £500 into James’ pension, tax and National Insurance free. This means that James’ tax and National Insurance will only be charged on £14,500. The employer does not have to pay employer’s National Insurance on the £500 extra pension contribution.

  Please note, it was announced at the Autumn Budget that the salary sacrifice rules for pension contributions will be restricted to £2,000 from April 2029. 

Taxable benefits

Generally, any salary that is given up in exchange for taxable benefits remains liable to income tax and class 1 National Insurance (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 (£129 per week in 2026/27) and the primary threshold (£242 per week in 2026/27), you do not pay class 1 contributions anyway, so switching from cash to a non-cash benefit will not save class 1 National Insurance 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 contributions, but your National Insurance record is not credited for that pay period. This means that you might lose entitlement to contributory benefits and the state pension, unless you receive National Insurance 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 an additional employer pension contributions. 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 class 1 contributions at a zero rate – as her weekly earnings are more than the lower earnings limit of £129. 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 – meaning she is no longer treated as having paid National Insurance. This could adversely affect Kerry’s entitlement to contributory benefits, statutory maternity pay, and statutory adoption pay and also her state pension entitlement. 

Kerry could be entitled to some National Insurance 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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