How It Works
You voluntarily give up part of your future salary. In return, your employer provides a benefit: typically a pension contribution, an electric vehicle lease, or a cycle to work voucher.
Because your contractual gross salary is lower, you pay less on three fronts:
- Income Tax — 20%, 40%, or 45% depending on your band
- National Insurance — 8% up to £50,270, 2% above (which you don't save with relief at source pensions)
- Student Loan Repayments — 9% above your plan threshold
Your employer also saves 15% Employer NI on the sacrificed amount. Some employers pass this saving on to you as an extra pension contribution. Always ask.
Worked Example: £50,000 Salary, £5,000 Pension
Here's what happens when a £50,000 earner puts £5,000 into their pension via salary sacrifice vs taking the cash:
| Take as Cash | Salary Sacrifice | You Save | |
|---|---|---|---|
| Gross Salary | £50,000 | £45,000 | — |
| Income Tax | £7,486 | £6,486 | £1,000 |
| Employee NI | £2,996 | £2,596 | £400 |
| Take-Home Pay | £39,518 | £35,918 | £1,400 saved |
With salary sacrifice, the £5,000 goes into your pension but only costs you £3,600 in reduced take-home pay. The other £1,400 is tax and NI you would have paid anyway.
Figures are approximate for 2025/26 using standard tax code 1257L, no student loans.Run your exact numbers →
Savings at Different Salary Levels
The higher your tax band, the more you save. Here's the effective cost of a £5,000 pension contribution via salary sacrifice:
| Salary | Tax Band | Tax + NI Saved | Real Cost of £5k Pension |
|---|---|---|---|
| £30,000 | Basic (20%) | £1,400 | £3,600 |
| £60,000 | Higher (40%) | £2,100 | £2,900 |
| £110,000 | 60% trap zone | £3,100 | £1,900 |
| £150,000 | Additional (45%) | £2,350 | £2,650 |
The 60% trap zone (£100k–£125,140) gives the biggest saving because salary sacrifice restores your Personal Allowance.
What You Can Sacrifice Into
Pension
The most common use. Your employer pays directly into your pension before any deductions. You get full tax and NI relief immediately without claiming anything back.
Annual allowance: £60,000 (or 100% of earnings)
Electric Vehicle
Lease a new EV from your gross pay. Benefit in Kind tax is only 3% for 2025/26 (rising to 4% from April 2026), making it far cheaper than buying or leasing personally.
Typical saving: 30–50% vs personal lease
Cycle to Work
Buy a bike and accessories tax-free. Most schemes let you spread the cost over 12 months from gross pay. E-bikes are included.
Typical saving: 25–39% depending on tax band
Salary Sacrifice vs Relief at Source (Pensions)
If your employer offers both, salary sacrifice is almost always better. Here's why:
| Salary Sacrifice | Relief at Source | |
|---|---|---|
| Income Tax relief | Automatic | Basic rate automatic; higher rate via Self Assessment |
| NI saving | Yes (8% / 2%) | No |
| Student loan saving | Yes | No |
| Employer NI saving | Yes (15%) | No |
| Reduces Adjusted Net Income | Yes | Yes |
Things to Watch
Salary sacrifice reduces your contractual salary. This can affect:
- Mortgage affordability: Some lenders use post-sacrifice salary. Many now accept pre-sacrifice, but check with your broker first.
- Life cover and income protection may reduce if your employer's scheme is based on salary multiples. Ask HR whether they use pre- or post-sacrifice salary.
- Your Statutory Maternity Pay is based on average weekly earnings. If those earnings are post-sacrifice, SMP could be lower. Some employers calculate on pre-sacrifice salary, so check.
- Your post-sacrifice salary cannot fall below National Minimum Wage (£23,809/year for 2025/26 at 37.5 hours/week). Your employer must refuse the sacrifice if it would.
Childcare Eligibility Cliff at £100,000
Tax-Free Childcare and the 30 hours free childcare entitlement are both lost if either parent has adjusted net income over £100,000. If you're close to this threshold, even a small salary sacrifice can bring you back under and restore these benefits. Tax-Free Childcare alone is worth up to £2,000/year per child.
Run Your Numbers
Enter your salary, pick your benefits, and see exactly how much you'd save with salary sacrifice vs taking cash.
Open Salary Sacrifice Calculator →Common Questions
What is salary sacrifice?
Salary sacrifice (also called salary exchange) is an arrangement where you agree to give up part of your future salary in return for a non-cash benefit from your employer, such as pension contributions, an electric vehicle lease, or a cycle to work scheme. Because your contractual salary is reduced, you pay less Income Tax, National Insurance, and student loan repayments.
How much can I save with salary sacrifice?
Savings depend on your tax band. A higher-rate taxpayer sacrificing £5,000 into a pension saves roughly £2,400 (40% tax + 2% NI + 6% student loan if applicable). A basic-rate taxpayer saves roughly £1,400 on the same amount. Your employer also saves 15% Employer NI, which some employers pass on to you as an extra pension contribution.
Does salary sacrifice affect my mortgage application?
It can. Your contractual salary is lower after sacrifice, which some lenders use for affordability checks. However, many major lenders now accept the pre-sacrifice salary figure. Ask your mortgage broker to confirm. If you're applying soon, consider timing your sacrifice arrangement around the application.
Can my employer refuse salary sacrifice?
Yes. Salary sacrifice is a voluntary arrangement that requires your employer's agreement. Not all employers offer it. If yours doesn't, you can ask — many employers are willing because they save Employer NI (15% on the sacrificed amount), which can be significant.
What is the difference between salary sacrifice and relief at source for pensions?
With salary sacrifice, your gross salary is reduced before any deductions are calculated, so you save Income Tax AND National Insurance. With relief at source, contributions are taken from your net pay and the pension provider claims back basic-rate tax — but you still pay NI on the full salary. Higher-rate taxpayers using relief at source must also claim extra relief via Self Assessment.