Salary Sacrifice Explained
A complete guide to understanding how salary sacrifice works, what benefits you can get, and how much tax and National Insurance you can save.
Salary sacrifice might sound like you're giving something up, but it's actually one of the smartest ways to reduce your tax bill while getting valuable benefits. Whether you're contributing to a pension, getting a bike through the cycle to work scheme, or leasing an electric car, understanding salary sacrifice can save you hundreds or even thousands of pounds each year.
What is Salary Sacrifice?
Salary sacrifice is an arrangement where you agree to give up part of your salary in exchange for a benefit from your employer. The benefit is provided "in kind" rather than as cash, and because you receive less salary, you pay less income tax and National Insurance.
How It Works in Practice:
For example, you agree to reduce your £30,000 salary by £1,000 per year to £29,000.
In exchange, they give you something worth £1,000 (like pension contributions, a bike, or childcare vouchers).
Because your salary is lower, you pay income tax and NI on £29,000 instead of £30,000. Your employer also saves on employer National Insurance.
The £1,000 benefit costs you less than £1,000 in take-home pay because of the tax savings.
The Key Benefit:
When you salary sacrifice, you avoid paying income tax and National Insurance on the sacrificed amount. This means a £1,000 benefit might only reduce your take-home pay by £600-£700, depending on your tax rate.
It's legal, encouraged by the government for certain benefits, and one of the most tax-efficient ways to receive compensation from your employer.
The Math: How Much Do You Actually Save?
Let's look at real examples to understand the savings. The amount you save depends on your tax rate and whether you're a basic rate (20%) or higher rate (40%) taxpayer.
Without Salary Sacrifice:
With Salary Sacrifice:
Result: You still get £1,000 into your pension, but it only costs you about £720 in take-home pay. You save £280 (28%) through reduced tax and NI.
Result: A £2,000 pension contribution only costs you £1,160 in take-home pay. You save £840 (42%)! Higher rate taxpayers benefit even more from salary sacrifice.
Common Salary Sacrifice Benefits
The most popular salary sacrifice scheme. Instead of your employer making pension contributions from your net pay, you reduce your salary and they contribute the gross amount.
Why it's great:
- • Save both income tax AND National Insurance (standard pension contributions only save income tax)
- • Your employer saves on employer NI, which they often add to your pension too
- • For basic rate taxpayers, effective cost is only 72p for every £1 into pension
- • For higher rate taxpayers, effective cost is only 58p for every £1 into pension
On a £40,000 salary, sacrificing £3,000 to pension saves you approximately £840/year in tax and NI. Plus your employer might add their £450 NI saving, giving you £3,450 in your pension for a £2,160 cost.
Get a bike and cycling equipment worth up to £1,000 (or more with some schemes) through salary sacrifice, typically spread over 12-18 months.
How it works:
- • Choose a bike and equipment worth up to your scheme limit
- • Your employer "hires" it to you via salary sacrifice
- • After the hire period, you can usually buy it for a small fee
- • Save 28-42% depending on your tax rate
A £1,000 bike costs you about £720 if you're a basic rate taxpayer (£60/month for 12 months). Higher rate taxpayers pay even less - around £580.
Lease a brand new electric car through salary sacrifice. This is one of the most valuable salary sacrifice schemes thanks to ultra-low Benefit-in-Kind (BiK) tax on electric vehicles.
Why electric cars are special:
- • Electric cars have only 2% BiK rate (2025-2026)
- • Massive tax savings compared to petrol/diesel company cars
- • Includes insurance, maintenance, and breakdown cover
- • No deposit or credit checks needed
A £35,000 electric car costing £500/month through salary sacrifice:
- • Gross cost: £500/month (£6,000/year)
- • Tax and NI savings: ~£2,100/year (basic rate)
- • Benefit-in-Kind tax on 2% of £35,000 = £140/year
- • Real cost: ~£4,040/year (£337/month)
You're driving a £35,000 electric car for £337/month with no deposit, including insurance and maintenance!
If you joined before the scheme closed in October 2018, you can still use childcare vouchers through salary sacrifice. New joiners should use Tax-Free Childcare instead.
Note: This scheme is closing on 2026-04-30. Existing members can continue until then, but new applications are not accepted. Consider Tax-Free Childcare as an alternative.
Some employers offer other salary sacrifice schemes like mobile phones, gym memberships, or additional holiday. However, not all benefits are tax-free through salary sacrifice.
Not all salary sacrifice schemes are tax-efficient. Some benefits (like gym memberships) are treated as taxable benefits, meaning you pay tax on them anyway. Always check before signing up.
How Employers Save Too
Salary sacrifice isn't just good for employees - employers save money too. Understanding this can help when negotiating salary sacrifice arrangements.
Employers pay 15% National Insurance on your salary above £5,000 per year. When you sacrifice salary, they save 15% on the sacrificed amount.
Example:
Many employers add some or all of this £450 to your pension as an incentive. This means you get even more value from salary sacrifice!
Pro tip: When negotiating a pension salary sacrifice arrangement, ask if your employer will share their NI savings with you. Many will add this to your pension contribution.
Important Things to Consider
Salary sacrifice reduces your "official" salary, which can affect benefits that are calculated based on your salary:
- • Mortgage applications: Lenders look at your reduced salary, which might lower how much you can borrow
- • Life insurance: Policies based on salary multiples will use the lower figure
- • Maternity/paternity pay: Statutory payments are based on your reduced salary
- • State benefits: Some means-tested benefits use your gross salary
Your salary after sacrifice cannot fall below the National Minimum Wage or National Living Wage for your age. This is a legal requirement and limits how much you can sacrifice if you're on a lower salary.
Most salary sacrifice arrangements have a minimum commitment period (often 12 months). You usually can't change or cancel the arrangement unless you have a "lifestyle change" like marriage, divorce, or having a child.
Make sure you can afford the commitment before signing up, as you generally can't get out of it early.
Good news: salary sacrifice reduces your student loan repayments too! Since student loans are calculated on your gross salary, a lower salary means lower repayments. This is another hidden benefit that makes salary sacrifice even more valuable.
Is Salary Sacrifice Worth It?
Usually YES if:
- • You're sacrificing for a pension (almost always worth it)
- • You're getting an electric car (huge tax benefits)
- • You're using cycle to work (great savings on bikes)
- • You can easily afford the reduced take-home pay
- • You don't need the extra salary for a mortgage application soon
- • You're a higher rate taxpayer (even bigger savings)
Be careful if:
- • You're applying for a mortgage soon (lower salary = less borrowing)
- • You're close to minimum wage (might not be allowed)
- • You're planning to take maternity/paternity leave (affects statutory pay)
- • You might need to cancel the arrangement early (often not possible)
- • The benefit has high BiK tax (might not save much)
- • Your cash flow is already tight
The Bottom Line:
For most people, especially for pensions and electric cars, salary sacrifice is one of the most tax-efficient ways to receive benefits from your employer. The tax savings are substantial, and the benefits are often things you'd buy anyway - just at a much better price.
Calculate Your Salary Sacrifice Savings
Use our salary calculator to see exactly how much you'd save through salary sacrifice. Include pension contributions to see the full tax benefits.
Calculate My SavingsQuick Summary
- ✓Salary sacrifice = pre-tax benefits
You reduce your salary and receive benefits before tax and NI are calculated
- ✓Save 28-42% on the sacrificed amount
Basic rate taxpayers save 28%, higher rate save 42%
- ✓Best for pensions and electric cars
These offer the biggest tax advantages through salary sacrifice
- ✓Employers save money too
15% employer NI savings, which they might share with you
- ✓Consider the impact on other benefits
Lower salary affects mortgages, maternity pay, and some benefits