Kristian Ferrell
The NBA salary cap is a tool used to maintain a level playing field across the league's teams. It is the maximum amount of money a team is allowed to spend on player payrolls to attract and retain talent on its roster. The salary cap is determined for each season based on a percentage of projected basketball-related income for the upcoming year. If a team's payroll exceeds the salary cap, they are subject to a luxury tax penalty on every dollar they spend over the cap. The NBA's cap is considered a soft cap, which gives teams wiggle room to creatively compensate players.
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What You'll Learn
Salary caps ensure fair play and a level playing field
Salary caps are a common feature in major North American sports leagues, including the NBA. They are designed to ensure fair play and a level playing field across teams, preventing wealthy teams from dominating the league by outspending their rivals. This ensures that the best players are not concentrated on a few rich teams, creating a competitive balance in the league.
The NBA's salary cap is a soft cap, which means that teams are allowed to exceed the cap, but they will face penalties for doing so. The soft cap gives teams some flexibility in how they compensate their players. The penalty for going over the cap is known as the "luxury tax", which is an incremental fine based on the extent of the excess spending. Teams that routinely exceed the cap may also face additional restrictions on roster improvements and future draft pick forfeiture.
The salary cap amount is determined for each season and is based on a percentage of the league's revenue or projected basketball-related income (BRI) for that season. For example, the salary cap for the 2024-25 season was set at $140.588 million. The cap amount can vary from team to team, but it generally ensures that there is no significant financial imbalance between franchises.
To ensure that players receive their fair share of league revenues, teams are required to spend at least 90% of the salary cap each season. This is known as the salary floor or minimum salary limit, and it is currently set at $126.529 million for the 2024-25 season. Teams that do not meet this floor must distribute the shortfall to the players on their roster.
The NBA's salary cap system also includes various exceptions and rules, such as the mid-level exception (MLE), which allows teams to sign players even if their payroll exceeds the salary cap. Other rules, like base year compensation (BYC), prevent teams from re-signing players to salaries specifically targeted to match other salaries in a trade, ensuring that salaries are based on basketball value rather than trade value.
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Hard vs. soft caps
The NBA salary cap is the limit to the total amount of money that National Basketball Association (NBA) teams are allowed to pay their players. The salary cap is calculated as a percentage of the league's revenue from the previous season.
The NBA has a soft salary cap, meaning that teams are allowed to go over the salary cap by using a variety of exceptions outlined in the collective bargaining agreement (CBA). In the 2023-24 season, 29 of the league's 30 teams spent more than the cap on player salaries. However, if a team's payroll exceeds a certain threshold, they must pay a tax, which is usually known as a "luxury tax". This tax is incremental, and there is also a repeat offender penalty for teams that have paid the tax in three of the previous four seasons. Half of the money collected from these taxes is distributed to the other teams in equal shares.
On the other hand, hard salary caps, as implemented in the NFL and NHL, forbid teams from going above the salary cap under any circumstances. These leagues also utilize "salary floors," which set a minimum amount that teams must spend on player salaries each year.
While the NBA has a soft cap, there are certain situations in which a hard cap is applied. For example, if a team uses its non-taxpayer mid-level exception (NTMLE), bi-annual exception (BAE), or acquires a player via sign-and-trade, it cannot spend over the "apron" for that calendar year. Additionally, teams below the second apron that make certain moves will be hard-capped at the second apron, preventing them from exceeding that amount.
The NBA has resisted implementing a true hard cap, and it remains to be seen if this will change in future negotiations with the National Basketball Players Association (NBPA).
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Salary floor and minimum salaries
The NBA salary cap is a soft cap, meaning that there are several exceptions that allow teams to exceed the salary cap to sign players. The salary cap is a set amount of money designed to limit what teams can spend on player payroll. The number is determined for each season based on a percentage of projected basketball-related income (BRI) for the upcoming year.
The league's collective bargaining agreement (CBA) outlines several exceptions that allow teams to go over the salary cap. For example, the mid-level exception (MLE) allows teams to sign one or more players despite their payroll exceeding the salary cap. In the 2023-24 season, teams using the "Taxpayer MLE" could offer first-year salaries of up to $5.2 million, while teams using the "Non-Taxpayer MLE" could offer up to $12.8 million.
Another exception is the two-way contract, which allows players with fewer than four years of NBA experience to split their time between an NBA team and a G League team. Two-way players are paid half of the league's minimum salary and can be converted to regular contracts during the season, after which they will receive the league's minimum salary, prorated for the remainder of the season.
The NBA also has a salary floor, which is the minimum amount that teams are required to spend on player salaries. For the 2022-23 season, the salary floor was set at 90% of the salary cap, or $111.29 million. Teams are required to meet this salary floor at the start of preseason training camp. If a team's payroll falls below the salary floor, they must spend enough to reach the floor by the start of the season, or they will have a cap hold assigned for the difference.
The minimum salary for players in the NBA varies depending on their years of experience. In the 2023-24 season, 10-day contracts for players with zero years of service were worth $64,000, while players with 10 or more years of service received $184,000. Second-round picks typically sign deals for the league's minimum salary, and teams can sign players for the NBA's minimum salary even if they are over the cap.
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Luxury tax and other penalties
The NBA salary cap is a soft cap, meaning that teams are allowed to go over the salary cap by using a variety of exceptions outlined in the collective bargaining agreement (CBA). However, if a team's payroll exceeds a certain threshold, they are subject to a "luxury tax" penalty. The luxury tax is an incremental fine based on the extent to which the team exceeds the salary cap. For example, in the 2023-24 season, franchises started by paying $1.50 to the league for every dollar they went over the threshold, and the rate incrementally increased the further they went over. Additionally, the league imposes a repeat offender penalty for those who have paid the tax in three of the previous four seasons.
The NBA's soft cap gives teams some flexibility in compensating players. For instance, the mid-level exception (MLE) is a mechanism that allows teams to sign players despite their payroll exceeding the salary cap. In the 2023-24 season, teams using the "Taxpayer MLE" could offer first-year salaries of up to $5.2 million, while teams using the "Non-Taxpayer MLE" could offer up to $12.8 million. These amounts change annually in line with the salary cap.
If a team's salary spending exceeds the "second apron", which is currently set at $188 million, they face additional restrictions on improving their roster. These penalties can include future draft pick forfeiture. Teams that routinely exceed the salary cap from season to season may also face reduced privileges in free agency.
Half of the money collected by the NBA from tax-paying teams is distributed equally among the other teams. This distribution helps to ensure a level playing field and fair competition across the league.
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Exceptions and trades
The NBA has a soft cap, which means that teams are allowed to go over the salary cap using a variety of exceptions outlined in the collective bargaining agreement (CBA). If a team's payroll exceeds a certain threshold, they must pay a tax, which starts at $1.50 to the league for every dollar they go over the threshold.
There are several exceptions to the NBA salary cap. The mid-level exception (MLE) is a tool that can be used by each team once a year to sign one or more players despite its payroll exceeding the salary cap. The bi-annual exception is similar, but it can only be used in non-consecutive seasons. The Larry Bird exception allows teams to exceed the salary cap to re-sign their own free agents, at an amount up to the maximum salary. To qualify, a player must have played three seasons without being waived or changing teams as a free agent. The traded player exception allows a team to acquire players as long as their collective incoming salary does not exceed a set amount. Teams can also sign players for the NBA's minimum salary even if they are over the cap, for up to two years in length.
Trades are also an important part of the NBA salary cap. Teams can make trades where one player salary is sent out and an equal or lesser salary comes back, and they can also include draft picks. However, certain players in the first few months of a new contract are subject to base year compensation (BYC), which prevents teams from re-signing players to salaries specifically targeted to match other salaries in a trade. A BYC player's trade value is 50% of their new salary or their previous salary, whichever is greater. Teams are normally allowed to trade draft picks up to seven years in the future, but this is reduced to six years for teams above the second apron.
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Frequently asked questions
A salary cap is a set amount of money that limits what teams can spend on player payroll.
The salary cap is calculated as a percentage of the league's revenue from the previous season.
If a team exceeds the salary cap, they must pay a "luxury tax" for spending more than the salary cap. The league also imposes a repeat offender penalty for teams that have paid the tax in three of the previous four seasons.
For the 2024–25 season, the salary cap is set at $140.588 million.
