Salary sacrifice explained
How giving up part of your pay can save tax and National Insurance, and what to watch for.
The short answer
Salary sacrifice means you agree to a lower salary, and your employer pays the difference into something else, most often your pension. Because your pay is lower, you pay less Income Tax and less National Insurance. A normal pension contribution through payroll usually only saves Income Tax.
A worked example
Take someone on £50,000 who wants £5,000 a year in their pension. As a basic-rate taxpayer, putting it in through salary sacrifice saves 20% Income Tax and 8% National Insurance, so £5,000 into the pension costs about £3,600 of take-home pay. Without sacrifice, the saving is only the 20% tax, so it costs about £4,000. The take-home pay calculator has a salary sacrifice option so you can test your own figures.
Other things it can be used for
- Cycle to work schemes.
- Electric cars through an employer scheme.
- Extra holiday, childcare vouchers on older schemes or technology schemes, depending on the employer.
Things to watch
- Your pay on paper is lower, which can reduce how much a mortgage lender will offer, see how much can I borrow for a mortgage.
- Statutory pay such as maternity pay can be based on your reduced salary. Check with your employer.
- Your pay cannot be reduced below the National Minimum Wage.
- Your student loan repayments fall slightly because they are based on your lower pay.
- From 6 April 2029 the government has announced a cap of £2,000 a year on the National Insurance saving for pension salary sacrifice. Contributions above that would be treated like normal pay for National Insurance. Check GOV.UK for the final rules.
Where to learn more
This guide is for information only and is not tax or financial advice.