Salary sacrifice explained
Salary sacrifice is one of the most powerful, legitimate tax savings available to employees. This guide explains how it works, the National Insurance bonus, and the points to watch.
What salary sacrifice is
Salary sacrifice means agreeing to give up part of your gross salary in exchange for a non-cash benefit, most commonly an employer pension contribution, but also electric-car schemes and the cycle-to-work scheme. Because you never "receive" the sacrificed pay, you don't pay Income Tax or National Insurance on it. That dual saving makes it more efficient than paying into a pension from your take-home.
The National Insurance bonus
An ordinary pension contribution saves Income Tax but not employee NI. Salary sacrifice saves both. On top, your employer saves their NI (15% from April 2025) on the sacrificed amount, and many generous employers add that saving to your pension too, boosting your pot at no extra cost to you. The calculator lets you include this.
Especially powerful at £100k+
When sacrifice can backfire
Because it lowers your gross salary, salary sacrifice can reduce things linked to salary: mortgage affordability, life cover or income protection based on salary, maternity/statutory pay, and you can't sacrifice below the National Minimum Wage. It can also slightly reduce State Pension qualifying earnings in rare low-pay cases. For most middle and higher earners the benefits far outweigh these, but check before sacrificing a large amount.
EV and cycle schemes
The same mechanism powers electric-car salary-sacrifice schemes (very tax-efficient thanks to low benefit-in-kind rates on EVs) and the cycle-to-work scheme. You pay for the car or bike from pre-tax salary, saving tax and NI, though a small benefit-in-kind charge applies to cars. These can be excellent value if your employer offers them.
Common mistakes
- Sacrificing below minimum wage. You can't reduce pay below the NMW, employers cap the sacrifice accordingly.
- Ignoring salary-linked benefits. Mortgage, life cover and statutory pay may be based on the lower salary. Check first.
- Forgetting the employer NI bonus. Ask whether your employer passes on their NI saving, it materially boosts your pension.
- Over-sacrificing past the annual allowance. Pension contributions above the £60,000 annual allowance can trigger a tax charge.