Are the tax and compliance consequences of offering or accepting cryptocurrency via a salary sacrifice scheme unclear or worrying? This guide focuses exclusively on crypto salary sacrifice schemes in England and explains what happens under PAYE, how HMRC treats Bitcoin delivered as a sacrificed benefit, employee income tax and National Insurance consequences, employer payroll duties, Capital Gains Tax risks on later disposals, and the exact documentary steps required to defend the scheme in an audit.
The content that follows gives concise answers up front, then provides detailed, practical guidance and templates of the processes employers and payroll teams should adopt.
Key takeaways: what to know in 1 minute
- Salary sacrifice that results in crypto delivered to an employee will usually create taxable benefits under PAYE unless the arrangement is structured to convert quickly into fiat and treat crypto purely as an administrative fiat payment. See HMRC guidance on cryptoassets: HMRC: tax on cryptoassets.
- Income tax and employee National Insurance are likely due on the cash equivalent value at the time the employee receives the crypto, with employer NIC and reporting obligations commonly triggered.
- Employers must update contracts, run accurate payroll valuations, submit details via FPS and keep rigorous records to avoid PAYE challenges and potential penalties. See PAYE for employers: gov.uk PAYE guidance.
- If the employee later disposes of the crypto, Capital Gains Tax (CGT) can apply based on the disposal proceeds less the value treated as income on acquisition; inadequate documentation increases HMRC challenge risk.
- Practical compliance is feasible but requires written contracts, exchange-rate stamping, immediate conversion options and AML/KYC processes; poorly designed schemes risk double taxation and penalties.
How crypto salary sacrifice schemes work under UK PAYE: core mechanics and common models
What is a salary sacrifice scheme in practice
A salary sacrifice scheme is an agreement where an employee gives up part of contractual pay in return for a benefit. The key legal element is a contractual change in terms of employment. For crypto salary sacrifice, this may mean reducing gross cash salary and providing an alternative payment or benefit that is crypto or crypto‑linked.
Practical models employers consider for crypto sacrifice
- Model A: employer reduces salary and transfers Bitcoin directly to employee wallet.
- Model B: employer reduces salary and purchases Bitcoin into a custodial account held on behalf of employees (employee beneficial interest recorded separately).
- Model C: employer reduces salary and gives a cash amount tied to the fiat value of Bitcoin at a set time (no crypto transfer; fiat only).
Model A is the highest risk for PAYE and CGT because it creates a clear disposal event and taxable benefit when crypto is received. Model C minimises crypto exposure but may defeat the purpose of providing crypto as a benefit.
When PAYE applies: timing and valuation rules
PAYE and employee NIC apply when a taxable benefit or payment arises in the tax year. For crypto delivered as benefit, the taxable amount is the cash equivalent at the time the employee obtains beneficial ownership. For valuation and timing, HMRC expects a reasonable commercial metric (GBP value at a recognised exchange rate at the time of transfer).
HMRC treatment of Bitcoin in salary sacrifice schemes: official positions and interpretative risks
How HMRC views crypto delivered as reward or benefit
HMRC treats cryptoassets as property for tax purposes. When crypto is received in return for employment, it is generally employment income. Specific guidance is found in HMRC's cryptoassets resources: HMRC: tax on cryptoassets. No HMRC clearance currently endorses direct crypto salary payments as exempt from PAYE.
Areas where HMRC challenges typically arise
- Valuation timing: using stale or later exchange rates to lower PAYE liability.
- Contractual form: failure to evidence genuine contractual salary sacrifice.
- Beneficial ownership: lack of clear records showing when ownership moved.
- Distinguishing a benefit‑in‑kind from a cash payment when employers convert crypto.
Example: HMRC concern in practice
If an employer transfers 0.01 BTC to an employee and values it at a low rate weeks earlier, HMRC may revalue at the higher market rate on receipt and assess PAYE/NIC on the uplift, creating unexpected liabilities and penalties.
Income tax and National Insurance implications for employees receiving crypto via salary sacrifice
Income tax consequence: how the amount is calculated
Income tax is due on the cash equivalent of the benefit. Calculation steps:
- Identify the moment the employee acquires beneficial ownership of Bitcoin.
- Convert that Bitcoin amount to GBP using a published exchange rate at that moment.
- Treat the GBP value as taxable employment income for PAYE and tax codes.
National Insurance: employee and employer positions
- Employee Class 1 NICs apply on earnings (employee portion) where the sacrificed arrangement reduces pensionable or NICable earnings.
- Employer Class 1 NICs may apply on the value of benefits; if the arrangement increases employer NIC exposure, it must be reported and paid.
Example calculation (illustrative)
- Gross salary sacrificed: £3,000 per annum (monthly £250).
- Employer buys 0.01 BTC on 1 March valued at £3,000 (GBP equivalent used for PAYE).
- Income tax (basic rate 20%) on £3,000 = £600 additional tax liability for employee across the year (or reflected in PAYE). Employee NIC at 12% on earnings between thresholds applies unless salary falls below primary threshold.
Actual payroll impact depends on pay frequency, tax code and whether sacrificed salary drops the employee below NIC/pension thresholds.
Employer obligations: payroll reporting and compliance steps for crypto salary sacrifice schemes
Contract changes and employment law steps
- Issue a written variation to the employment contract documenting the salary reduction, effective date and the benefit (crypto or cash equivalent).
- Obtain explicit employee consent in writing; unilateral changes can lead to disputes.
Payroll reporting: FPS, P11D and PAYE returns
- Report affected pay through Full Payment Submission (FPS) with correct gross pay and taxable benefit values on the appropriate payroll period: PAYE for employers.
- Where benefits are non‑cash and subject to PAYE, include as earnings rather than P11D where PAYE applied in the payrun.
Recordkeeping: mandatory entries and retention
Maintain:
- Signed contract amendment and consent forms.
- Exchange rate/time-stamped valuation evidence for each transfer.
- AML/KYC records for the employee wallet or custody provider.
- Payroll run records showing NIC and PAYE calculations.
Retain for six years in line with HMRC requirements.
AML, custody and FCA considerations
Where the employer or provider holds crypto or transfers it on behalf of employees, anti‑money laundering and financial promotion rules may apply. Check FCA guidelines on cryptoassets: FCA: cryptoassets.
Capital Gains Tax risks when employees later dispose of crypto received by salary sacrifice
Basis for CGT when crypto was taxed as income
When crypto is taxed as employment income on receipt, the amount taxed becomes the acquisition cost for CGT purposes. Subsequent disposals are subject to CGT on proceeds minus the acquisition cost.
Common CGT pitfalls and HMRC adjustments
- Failure to evidence the acquisition cost (the value taxed) will invite HMRC to use market rates at receipt; this increases the gain and CGT owed.
- If the employer recorded a different GBP valuation for PAYE than the figure used as acquisition cost, HMRC may require reconciliations.
Example CGT scenario
- Acquisition (taxed as income): 0.01 BTC valued at £3,000 (taxed as income).
- Disposal later at £6,000: CGT due on £3,000 (disposal proceeds £6,000 minus acquisition cost £3,000), subject to annual exempt amount and rates (10%/20% depending on income band).
Double taxation risk and reliefs
Double taxation can occur if PAYE is incorrectly applied and acquisition cost is disputed. Proper documentation avoids double taxation; no special relief exists merely because the asset was employment-related.
Practical steps to document and audit crypto sacrifices: checklist and templates
Pre-implementation legal checklist
- Update employment contracts and obtain written employee consent.
- Decide the operational model (direct transfer, custodial, fiat conversion).
- Agree valuation method and exchange provider and document it in policy.
- Confirm AML/KYC, custody arrangements and FCA implications.
- Pilot with consenting staff and monitor payroll runs.
Payroll and accounting checklist
- Run payroll treatment through a test with the finance team and reconcile NIC and PAYE impacts.
- Ensure FPS reporting includes the taxable benefit value at the correct pay period.
- Create a template valuation certificate for each crypto transfer (timestamp, amount, GBP value, source exchange API snapshot).
Documentation templates to keep
- Contract amendment template (signed).
- Employee consent form.
- Valuation certificate (template row: date/time, crypto amount, exchange name, GBP spot rate, GBP value, signature).
- Transfer record showing wallet address, transaction hash, custody provider reference.
Audit defence steps
- Collate signed documents, valuation certificates, payroll FPS submissions, and wallet transaction records.
- Produce a reconciliation showing how taxable amounts reported align with funds actually transferred or converted.
Comparative table: employer vs employee costs and compliance responsibilities
| Item |
Employer responsibility |
Employee impact |
| PAYE reporting |
Run PAYE on cash equivalent, submit FPS, pay employer NIC |
Higher reported earnings may increase tax liability |
| NIC |
Employer Class 1 NIC on value where applicable |
Employee pays employee NIC on reduced cash pay if above thresholds |
| Valuation |
Must keep timestamped evidence of GBP value |
Acquisition cost for CGT equals reported GBP value |
| AML/KYC |
Ensure provider compliance or run checks |
May need to complete KYC before receiving crypto |
| Pension/auto-enrolment |
Must check effect on pensionable pay |
Reduced pensionable earnings may reduce contributions |
Benefits, risks and common mistakes when using crypto salary sacrifice schemes
✅ Benefits / when crypto salary sacrifice can make sense
- Can be attractive as an employee benefit for recruitment and retention where employees value crypto.
- Potential upside for employee if crypto appreciates; employer may benefit from lower cash payroll.
- Viable where employer uses custodial, compliant provider and converts rapidly to fiat to limit volatility.
⚠️ Risks and mistakes to avoid
- Failing to document contractual change and employee consent.
- Not valuing at the right timestamp or using unreliable exchange data.
- Overlooking AML/KYC and FCA obligations for custodial arrangements.
- Ignoring pension auto-enrolment and other statutory benefit consequences.
Visual process: how to implement a compliant crypto salary sacrifice flow
Crypto salary sacrifice: compliant flow
🔁 Step 1 → 🧾 Step 2 → 🔒 Step 3 → ✅ Step 4
- 🔁 Agree contract change: signed amendment and consent.
- 🧾 Valuation and payroll: capture timestamped GBP value, run PAYE/NIC in FPS.
- 🔒 Transfer & custody: KYC, transaction hash, custody records retained.
- ✅ Reconcile & record: link payroll entries to blockchain evidence and valuation certificate.
Frequently asked questions
Can an employer pay salary directly in Bitcoin and avoid PAYE?
Direct payment in Bitcoin does not avoid PAYE. HMRC treats crypto paid for employment as earnings; employers must operate PAYE unless a genuine commercial alternative leaves no taxable benefit.
How should the GBP value of Bitcoin be proven for PAYE?
Use a timestamped exchange rate from a reputable exchange or an average of several exchanges, saved as a PDF or signed valuation certificate at the moment of transfer.
Does receiving Bitcoin through salary sacrifice affect pension auto-enrolment?
Yes. If the salary reduction lowers pensionable earnings, both employer and employee pension contributions may change. Check auto‑enrolment rules and document the effect.
If conversion to cash happens before the employee acquires beneficial ownership, CGT exposure for the employee may be avoided. If the employee receives crypto and later disposes, CGT can apply.
What anti‑money laundering checks are required?
Employers should rely on regulated custody providers with robust AML/KYC processes or perform equivalent checks when transferring crypto directly to employees.
How long should records be kept in case HMRC requests them?
Keep payroll, valuation, contract amendments and transaction evidence for at least six years to satisfy HMRC recordkeeping requirements.
Your next step:
- Review or draft a contract amendment and an employee consent template and pilot with a small volunteer group.
- Agree a valuation policy (exchange sources, timestamp method) and build a payroll template that captures the GBP equivalent and FPS entries.
- Choose a regulated custody partner or define immediate conversion rules and document AML/KYC processes.
Alan White
With over 12 years of experience guiding individuals and businesses through cryptocurrency taxation in the UK, this author provides practical, real-world advice on managing crypto taxes confidently. Covering everything from Bitcoin tax basics and HMRC compliance to strategies, case studies, and tools, every article on Bitcoin Tax UK is designed to give readers clear guidance, actionable steps, and trusted insights. The goal is to empower users to navigate crypto taxation safely, efficiently, and with confidence.