Salary sacrifice explained

Salary sacrifice is an agreement between you and your employer to give up part of your salary in exchange for a non-cash benefit. The most common is a pension contribution, but schemes also cover things like electric cars, bikes and childcare vouchers for older arrangements. Because the sacrificed amount never becomes salary, you don’t pay income tax or National Insurance on it. This guide explains how it works and what to watch out for.

How salary sacrifice works

Under a salary sacrifice arrangement, your contract is changed so that your cash salary is lower, and your employer provides a benefit worth the difference. With a pension, your employer pays the sacrificed amount straight into your pension as an employer contribution.

Because your salary is lower:

• you pay less income tax;
• you pay less employee National Insurance;
• you repay less on any student loan;
• your employer pays less employer National Insurance, at 15% on earnings above the secondary threshold.

HMRC’s guidance on salary sacrifice for employers explains how the arrangements work.

Worked example: a basic-rate taxpayer

Take someone earning £35,000 who sacrifices £2,000 a year into their pension.

• Their income tax falls by £400.
• Their National Insurance falls by £160.
• Their take-home pay falls by only £1,440.

So each £1 in their pension costs them about £0.72. Their employer also saves £300 of employer NI. Some employers add some or all of that saving to your pension, which makes the arrangement even better value.

Compared with other ways of paying into a pension

With a net pay arrangement, contributions are taken before income tax, so you get tax relief but still pay National Insurance on the full salary. With relief at source, you get basic-rate relief added by your provider and claim any higher-rate relief yourself, but again no NI saving. Our guide to pension tax relief explains both.

Salary sacrifice adds the NI saving on top. For a higher-rate taxpayer on £60,000 sacrificing the same £2,000, the take-home cost is £1,160, or about £0.58 for each £1 in the pension, because they save tax at the higher rate as well as NI at the upper rate of 2%.

For people in the Personal Allowance taper above £100,000, salary sacrifice can be particularly valuable, because it reduces adjusted net income. See our guide to the Personal Allowance taper trap.

Effects on mortgages and borrowing

Your contractual salary is lower after a sacrifice, and that’s the figure on your payslip and P60. Some lenders base affordability on salary after sacrifice, which could reduce how much you can borrow. Others will consider your pre-sacrifice salary if your employer confirms it. If you’re planning to apply for a mortgage, check with the lender or a broker, and consider whether to change your sacrifice beforehand. Most schemes let you change your arrangement once a year or after a major life event.

Effects on benefits and statutory pay

Some payments are based on your earnings after the sacrifice:

• Statutory Maternity, Paternity, Adoption and Shared Parental Pay: the earnings-related part is based on your average weekly earnings in a set period. A sacrifice reduces those earnings and can reduce your pay. Many employers keep pension contributions going on your pre-sacrifice salary during leave. Our maternity pay calculator shows how SMP is worked out.
• Eligibility thresholds: to qualify for statutory pay, your average earnings must be at least the lower earnings limit, which for weekly pay is £129. A large sacrifice on a modest salary could take you below it.
• State benefits: benefits such as Universal Credit look at your actual earnings, so a sacrifice can increase entitlement in some cases.
• Life cover and redundancy pay: if these are based on salary, check whether your employer uses the pre-sacrifice figure.

The High Income Child Benefit Charge is based on adjusted net income, so a sacrifice that reduces your salary can also reduce or remove the charge.

The minimum wage floor

A salary sacrifice can’t reduce your cash pay below the National Minimum Wage or National Living Wage for the hours you work. For workers aged 21 and over, the National Living Wage is £12.71 an hour. GOV.UK lists the rates for every age group, and your employer must check that your cash pay after the sacrifice still meets the rate for your age. If you’re paid close to the minimum, your employer may limit how much you can sacrifice or not offer the scheme to you.

Sacrificing a bonus

Many employers let you sacrifice part or all of a bonus into your pension before it’s paid. This saves income tax and NI at your marginal rate on the bonus, which can be a large saving if the bonus would take you into a higher band. The bonus tax calculator shows how much of a bonus you keep with and without a pension contribution.

Changes announced for 2029

The government has announced that, from April 2029, the National Insurance saving on pension contributions made through salary sacrifice will be capped at a set amount each year. Income tax relief is not affected. Until then, the current rules apply in full. GOV.UK has the details in its note on changes to salary sacrifice for pensions.

Is salary sacrifice right for you?

For most employees, salary sacrifice is the cheapest way to save into a pension. It’s worth taking a closer look if you’re applying for a mortgage, expecting to take maternity or parental leave, or earning close to the minimum wage. Remember that money in a pension usually can’t be accessed until later in life.

Use our salary sacrifice calculator to see the effect of a sacrifice on your take-home pay, your pension and your employer’s NI. You can also choose “Salary sacrifice” as the pension method in our take-home pay calculator.