Salary sacrifice explained: how it works and how much you save
Salary sacrifice is an agreement to give up part of your salary in exchange for a non-cash benefit, most often a bigger pension contribution. Because your salary goes down, you pay less income tax and National Insurance.
How does salary sacrifice work?
You and your employer agree to change your contract so your gross salary is lower. Your employer then puts the amount you've given up into the benefit instead, such as your pension. Tax and National Insurance are worked out on the lower salary, so you save both, and your employer saves its own National Insurance too. Some employers pass part of that saving into your pension.
How much can you save?
A basic-rate taxpayer sacrificing £100 a month into a pension saves £20 income tax and £8 National Insurance, so their take-home pay falls by only £72. For higher-rate taxpayers the saving is £40 tax and £2 NI. From April 2029 the government plans to cap NI-free pension salary sacrifice at £2,000 a year, but income tax relief isn't affected.
Common salary sacrifice schemes
Pensions are the biggest. Others include electric car schemes (with a low benefit-in-kind rate), cycle to work, extra holiday and workplace nurseries. Childcare vouchers have closed to new joiners.
Salary sacrifice and the £100k limit
Salary sacrifice reduces your adjusted net income, which can bring you back under £100,000. That keeps your Personal Allowance and your eligibility for 30 hours of funded childcare and Tax-Free Childcare. See our guide to the 60% tax trap.
Things to watch for
A lower salary can reduce statutory pay such as maternity pay, affect how much you can borrow for a mortgage, and your salary must not fall below the National Minimum Wage. Check with your employer before signing up.