Salary Sacrifice
An arrangement where you give up part of your salary in exchange for a non-cash benefit such as employer pension contributions, a cycle-to-work scheme, or an electric car. Because salary sacrifice reduces your gross pay, you save both income tax and National Insurance on the sacrificed amount. Employers also save on their Class 1 NI contributions, which makes it attractive for businesses to offer as a benefit.
How it works
For an arrangement to count as genuine salary sacrifice, it must involve an actual change to your employment contract, not just a payslip label, and your cash pay cannot be reduced below the National Living Wage as a result — this can limit how much lower earners are able to sacrifice.
The tax and National Insurance savings apply because the sacrificed amount never counts as your pay in the first place, rather than being taxed and then relieved afterwards. Employers benefit too, since they also stop paying their own Class 1 NI on the sacrificed portion, which is why many offer enhanced pension contributions in exchange for a sacrifice.
Because your official salary is reduced, salary sacrifice can also affect things tied to your headline pay figure, such as mortgage affordability assessments or means-tested benefit calculations, so it's worth checking those implications before committing to a large sacrifice.
Example: savings from sacrificing £3,000 into a pension
A basic-rate taxpayer earning £40,000 sacrifices £3,000 of salary into their pension, reducing their pay for tax and NI purposes to £37,000.
Income tax saved at 20% on the £3,000 is £600.
Employee National Insurance saved at 8% on the same £3,000 is £240, for a combined saving of £840 compared with contributing the same amount from net pay.
Frequently asked questions
Can salary sacrifice take my pay below minimum wage?
No, HMRC rules prevent an arrangement from reducing your cash pay below the National Living Wage, which can restrict how much lower earners are able to sacrifice.
Does salary sacrifice affect anything besides tax?
It can — because your official salary is lower, it may affect mortgage affordability checks or means-tested benefit calculations, so it's worth checking before agreeing to a large sacrifice.
Is this the same as claiming pension tax relief?
No, salary sacrifice avoids income tax and National Insurance on the sacrificed amount entirely at source, while standard pension contributions are taxed first and relief is added or claimed afterwards.
Related Terms
Pension Tax Relief
A government top-up on pension contributions that effectively returns income tax paid on the contributed amount, making pensions a highly tax-efficient saving vehicle.
Annual Allowance
The maximum amount you can contribute to registered pension schemes each tax year while still receiving tax relief, currently set at £60,000.
Relief at Source
A method of pension tax relief where you contribute from your net (after-tax) pay and the pension provider claims basic-rate tax relief of 20% directly from HMRC, topping up your pension automatically.
National Insurance
A system of compulsory contributions paid by employees, employers, and the self-employed that funds state benefits including the State Pension, Statutory Sick Pay, and Maternity Pay.
Try the calculator
Use our free tool to see how salary sacrifice affects your tax.