Quick Answer
Salary sacrifice lets you give up part of your gross salary in exchange for a non-cash benefit, most commonly a pension contribution or electric car. Because the sacrifice happens before tax and National Insurance are calculated, you pay less of both. For a basic rate taxpayer, every £100 sacrificed costs only £72 in take-home pay, the 20% income tax plus 8% employee National Insurance you would otherwise have paid.
What is salary sacrifice?
Salary sacrifice is an arrangement where you agree with your employer to give up a portion of your gross salary. In return, your employer provides a benefit of equivalent value, a pension contribution, an electric car, a cycle-to-work bike, or childcare vouchers, depending on the scheme.
The key word is "gross." You sacrifice before HMRC gets involved. That means both income tax and National Insurance are calculated on your reduced salary.
The arrangement must be agreed in your employment contract, and it must be made before the salary is due to be paid, as HMRC's guidance on sacrificing salary sets out, a sacrifice agreed after the pay has been earned is not effective. Your employer benefits too, they pay less employer National Insurance when your salary is reduced.
How salary sacrifice reduces your tax and National Insurance
Take a basic rate taxpayer earning £35,000 who sacrifices £3,000 per year into their pension.
Their taxable salary drops to £32,000. They now pay income tax on £32,000 instead of £35,000, a saving of £600 in income tax (20% of £3,000). They also pay less employee National Insurance, a saving of approximately £240 (8% of £3,000).
Total saving: roughly £840. They received £3,000 in pension contributions for an effective cost of £2,160. The employer pays the sacrificed amount straight into your workplace pension, so you never see, or pay tax on, that money.
Per £100 sacrificed, the saving by tax band looks like this:
| Tax band | Income tax saved | Employee NI saved | Total saved per £100 |
|---|---|---|---|
| Basic rate (20%) | £20 | £8 | £28 |
| Higher rate (40%) | £40 | £2 | £42 |
| Additional rate (45%) | £45 | £2 | £47 |
Compare this to making a personal pension contribution from net pay. You would get 20% basic rate tax relief, but not the National Insurance saving. Salary sacrifice is more efficient for most employees.
One forward-looking note: at Budget 2025 the government announced that from April 2029, pension contributions made through salary sacrifice will only keep their National Insurance exemption up to £2,000 per year, amounts above that cap will attract NI in the same way as ordinary pay. Until then, the full NI saving continues to apply.
Worked example: pension contributions
Sophie earns £40,000. She wants to contribute £4,000 per year to her pension.
Without salary sacrifice:
- Income tax on £40,000: (£40,000 − £12,570) × 20% = £5,486
- Employee NI on £40,000: (£40,000 − £12,570) × 8% = £2,194
- Combined tax and NI: approximately £7,680
- She contributes £4,000 gross from net pay, that costs her £3,200 out of her take-home, with HMRC adding the £800 of tax relief directly to the pension
With salary sacrifice:
- Contractual salary reduced to £36,000
- Income tax on £36,000: (£36,000 − £12,570) × 20% = £4,686
- Employee NI on £36,000: (£36,000 − £12,570) × 8% = £1,874
- Combined tax and NI: approximately £6,560
- Her employer pays the full £4,000 directly into the pension
- Her take-home pay falls by £1,120 (28% of £4,000), so £4,000 in her pension costs her £2,880
Sophie gets the same £4,000 into her pension either way, and the tax relief is identical, the difference is National Insurance. Via salary sacrifice the contribution costs her £2,880 instead of £3,200, an extra saving of £320 per year (the 8% employee NI on the £4,000 sacrificed). Over a working lifetime that difference is significant.
For a precise calculation, try our salary sacrifice calculator.
Salary sacrifice for electric cars
The electric vehicle salary sacrifice scheme is one of the most valuable tax-efficient benefits currently available in the UK. An employer leases an electric car and makes it available to an employee in exchange for a reduced salary.
The benefit-in-kind tax rate for fully electric cars is 4% for 2026/27, up from 3% in 2025/26 and 2% in 2024/25. This is still exceptionally low compared to petrol and diesel vehicles, which attract rates of 15–37%.
On a car with a list price of £35,000, the taxable benefit is just £1,400 per year (4% of £35,000). A basic rate taxpayer pays £280 in tax on that benefit. Meanwhile, they have access to a brand new car with charging included.
The saving compared to buying or leasing personally can run to thousands of pounds each year, particularly for higher rate taxpayers. Naturally, the scheme only makes sense if you actually want an electric car.
Is salary sacrifice worth it?
For most employees, yes, particularly for pension contributions. The combination of income tax and National Insurance savings makes it materially better than contributing from net pay.
It works best when:
- You are a basic or higher rate taxpayer
- You have stable earnings and will not need the sacrificed amount
- Your employer passes on their National Insurance saving (some do, adding it to your pension)
- The benefit is something you would have purchased anyway
It is less suitable when:
- Your salary would drop below the National Living Wage (£12.71 per hour from April 2026)
- You are applying for a mortgage soon, as lenders assess income on the reduced contractual salary
- You are close to the lower earnings limit for state pension purposes (check the current threshold on GOV.UK, it rises slightly each April)
- The benefit is something you do not actually want or need
The 60% tax trap
Employees earning between £100,000 and £125,140 face an effective 60% marginal tax rate. HMRC withdraws the personal allowance (£12,570) at a rate of £1 for every £2 earned above £100,000.
If your income is in this range, salary sacrifice becomes extremely valuable. Every £1 sacrificed below £100,000 saves you 60p in effective tax: 40% income tax plus the withdrawal of personal allowance. Directors in this bracket often sacrifice into a pension specifically to claw back the full personal allowance.
If you earn just above £100,000, it is worth considering whether a salary sacrifice arrangement could bring your income below that threshold. See our corporation tax calculator if you operate through a limited company and are considering similar strategies, and our inside vs outside IR35 comparison if you contract, pension sacrifice via the company is one of the planning options that disappears when a contract falls inside the rules.
Can you sacrifice 100% of your salary?
No. Your contractual salary cannot drop below the National Living Wage or National Minimum Wage, depending on your age. For workers aged 21 and over, the National Living Wage is £12.71 per hour from 1 April 2026, you can check every band on the GOV.UK National Minimum Wage rates page.
In practice, most salary sacrifice arrangements are structured well above this floor. Your employer's HR or payroll team will be able to confirm the maximum amount you can sacrifice under your particular scheme.
What happens if you leave your employer?
When you leave, the salary sacrifice arrangement ends. Your pension contributions made via salary sacrifice remain in your pension pot. If you were part of a car scheme, the terms for ending the lease early should be set out in your contract, early termination fees can apply.
Frequently asked questions
Does salary sacrifice reduce my pension contributions?
Salary sacrifice for pension means your employer makes the full contribution on your behalf. Your own NI-saving is typically added to the contribution, which can make it slightly larger than a personal contribution of the same headline amount. Check your scheme documents for the exact treatment.
Will salary sacrifice affect my mortgage application?
Yes, potentially. Mortgage lenders base affordability on your contractual salary, the reduced figure after sacrifice. If you are planning to apply for a mortgage in the next year, discuss this with a mortgage broker before entering a salary sacrifice arrangement.
Is salary sacrifice the same as salary exchange?
Yes. Salary exchange is another name for salary sacrifice. They are the same arrangement described differently by different employers.
Does salary sacrifice affect my state pension?
It can, if your salary drops below the lower earnings limit for that tax year (check the current figure on GOV.UK). Below this threshold your NI record is not credited for state pension purposes. In practice, most salary sacrifice arrangements leave earnings well above this level.
How does salary sacrifice work for part-time employees?
The same rules apply. If you work part time, use our pro rata calculator to confirm your actual salary, then calculate the sacrifice on that figure rather than a full-time equivalent.
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