Salary sacrifice is one of the most effective yet underused tax-saving strategies available to UK employees. By restructuring how your employer pays you, you can save both income tax and National Insurance — potentially putting hundreds or even thousands of pounds back in your pocket each year.
What Is Salary Sacrifice?
Salary sacrifice (sometimes called salary exchange) is an arrangement where you agree to give up part of your gross salary in exchange for a non-cash benefit provided by your employer. Because the sacrificed amount never reaches you as pay, it’s not subject to income tax or National Insurance.
It’s a formal change to your employment contract — your contractual salary is reduced, and your employer provides the agreed benefit instead. The most common use is for pension contributions, but it can also apply to cycle to work schemes, electric cars, and other benefits.
How Salary Sacrifice Saves You Money
The saving comes from avoiding both income tax and employee National Insurance on the sacrificed amount. With a normal pension contribution, you get tax relief but still pay NI on the full salary. With salary sacrifice, neither tax nor NI is due on the portion you give up.
Here’s a comparison for a basic rate taxpayer contributing 5% of their salary:
| Gross Salary | 5% Contribution | Annual Income Tax Saving | Annual NI Saving | Total Extra Saving vs Net Pay |
|---|---|---|---|---|
| £30,000 | £1,500 | £0* | £120 | £120 |
| £40,000 | £2,000 | £0* | £160 | £160 |
| £50,000 | £2,500 | £0* | £200 | £200 |
*Income tax relief is the same under both methods for basic rate taxpayers. The extra saving from salary sacrifice is the National Insurance — 8% on the sacrificed amount.
For higher rate taxpayers (40%), the NI saving is the same, but the pension contribution is also more efficiently relieved, as there’s no need to claim higher rate relief through Self Assessment — it happens automatically.
Example: A higher rate taxpayer earning £60,000 who sacrifices £5,000 into their pension saves roughly £400 in NI (8% on £5,000) compared to making a standard net pay contribution — plus avoids the hassle of claiming extra tax relief.
Salary Sacrifice for Pensions
Pension salary sacrifice is the most popular scheme and is offered by most large employers. Your employer redirects the sacrificed amount into your workplace pension, and because it’s technically an employer contribution, it benefits from more favourable tax treatment.
With salary sacrifice pensions:
- You save employee NI (8%) on the sacrificed amount
- Your employer saves employer NI (13.8%) too — many employers pass some of this saving on to you as an enhanced pension contribution
- Higher and additional rate taxpayers receive full relief automatically (no Self Assessment claim needed)
Ask your HR department whether your employer offers pension salary sacrifice and whether they share the employer NI saving. If they do, it’s almost always worth opting in. Our workplace pension guide explains pension contributions in more detail.
Other Salary Sacrifice Schemes
Cycle to Work
Under the cycle to work scheme, your employer buys a bicycle and related equipment on your behalf, and you pay for it through salary sacrifice over 12–18 months. Because you avoid tax and NI on the payments, you effectively save 30–40% compared to buying the bike yourself (depending on your tax rate).
Electric Car Scheme
One of the most generous salary sacrifice benefits available. You can lease a brand new electric vehicle through your employer and pay via salary sacrifice. The benefit-in-kind (BIK) rate for electric cars is just 2% in 2025/26, meaning you could save up to 60% compared to leasing or buying the car privately.
This makes salary sacrifice electric car schemes extraordinarily good value — it’s currently one of the cheapest ways to drive a new electric vehicle.
Childcare Vouchers (Legacy)
The childcare voucher scheme closed to new entrants in October 2018, but existing members can continue to use it. It allows up to £243 per month (basic rate taxpayers) to be sacrificed for childcare costs. New parents should look at Tax-Free Childcare instead, which is available to all eligible families.
Workplace Nursery
If your employer provides or funds a workplace nursery, the full cost can be provided through salary sacrifice with no BIK charge — making it potentially more valuable than childcare vouchers or Tax-Free Childcare for high earners.
Impact on Other Benefits
Before opting into salary sacrifice, consider how a lower contractual salary might affect you:
- Mortgage applications — some lenders use your reduced salary figure, which could lower the amount you can borrow. Discuss with your mortgage adviser
- Statutory Maternity/Paternity Pay — based on your actual (reduced) salary, so could be lower
- Student loan repayments — calculated on your reduced salary, which may slightly reduce your repayments (a small benefit)
- Life insurance and income protection — if linked to your salary, the payout may be based on the reduced amount. Check your policy
- Pension-related calculations — some defined benefit schemes base your pension on your reduced salary. Always check before sacrificing
These impacts are usually minor for moderate sacrifice amounts, but they’re worth understanding before committing to a large sacrifice.
National Minimum Wage Restriction
By law, salary sacrifice cannot reduce your cash earnings below the National Minimum Wage (NMW) or National Living Wage. For 2025/26, the National Living Wage is £12.21 per hour for workers aged 21 and over.
If a proposed sacrifice would take you below NMW, your employer should not allow it. This mainly affects lower-paid workers considering larger sacrifices.
Employer Savings Too
Salary sacrifice isn’t just good for employees — employers save 13.8% employer National Insurance on every pound sacrificed. Good employers pass this saving on (or part of it) as additional pension contributions for their staff. This creates a genuine win-win.
If your employer doesn’t currently offer salary sacrifice for pensions, it may be worth raising it with HR. The employer NI saving often covers the administrative cost of setting up the scheme.
Is Salary Sacrifice Worth It?
For pensions: Almost always yes. The NI saving is guaranteed, the tax treatment is straightforward, and many employers enhance contributions further. Unless your salary is close to NMW or you’re about to apply for a mortgage, there’s little reason not to use it.
For electric cars: Excellent value at current BIK rates. If you need a new car and can access a scheme, the savings are substantial.
For cycle to work: Worth it if you genuinely want a bike. The discount is meaningful, though the amounts involved are smaller.
Use our take-home pay calculator to model the impact of salary sacrifice on your pay, and check our National Insurance guide for more on how NI affects your earnings.
Key Takeaways
- Salary sacrifice saves both income tax and National Insurance on the sacrificed amount
- Pension salary sacrifice is the most common and most beneficial scheme for most employees
- Electric car salary sacrifice offers savings of up to 60% compared to private leasing
- Check the impact on mortgage affordability, maternity pay, and other salary-linked benefits
- You cannot sacrifice below the National Minimum Wage