What is Salary Sacrifice?
An arrangement where you give up part of your salary in exchange for a non-cash benefit, saving tax and NI.
Key Facts
- ✓ Reduces gross salary before tax and NI are calculated
- ✓ Saves income tax and employee NI on the sacrificed amount
- ✓ Employer also saves on employer NI (15%)
- ✓ Most common for pension contributions
- ✓ Also available for Cycle to Work, childcare, electric cars
- ✓ Lower reported salary may affect mortgage applications
Explanation
Salary sacrifice is an arrangement between you and your employer where you agree to reduce your contractual gross salary in exchange for a non-cash benefit — most commonly additional employer pension contributions, but also childcare vouchers, Cycle to Work schemes, or ultra-low emission company cars. Because the salary reduction happens before income tax and National Insurance are calculated, you save both taxes on the sacrificed amount. Your employer also saves on employer NI (15%). For example, if a higher rate taxpayer sacrifices £500/month into their pension, they save £200 in income tax and £40 in NI that they would otherwise have paid. The trade-off is that your reported salary is lower, which can affect mortgage applications, statutory pay calculations, and any benefits linked to salary. Your employer must ensure your remaining salary does not fall below National Minimum Wage.
Try the calculator: Use our free calculator to see how salary sacrifice affects your finances.
Salary Sacrifice Calculator →Other Glossary Terms
The system HMRC uses to collect income tax and National Insurance directly from employee wages.
National InsuranceA UK tax on earnings and self-employed profits that funds the state pension, NHS, and benefits.
Personal AllowanceThe amount of income you can earn each year before paying income tax — currently £12,570.
Basic Rate (20%)The 20% income tax rate applied to taxable income between £12,571 and £50,270.
Higher Rate (40%)The 40% income tax rate applied to taxable income between £50,271 and £125,140.
Additional Rate (45%)The 45% income tax rate applied to taxable income above £125,140.
Frequently Asked Questions
What does salary sacrifice mean?
An arrangement where you give up part of your salary in exchange for a non-cash benefit, saving tax and NI.
Why does salary sacrifice matter?
Understanding salary sacrifice helps you make informed financial decisions and ensure you pay the correct amount of tax. Getting it wrong could mean overpaying or underpaying HMRC, which may result in penalties or missed savings. Use our calculators to see how salary sacrifice applies to your personal situation.
Where can I find more information about salary sacrifice?
HMRC publishes official guidance on GOV.UK for all UK tax topics. For a quick overview, our glossary entries are written in plain English and updated each tax year. You can also use our free online calculators to model different scenarios and understand how changes to your income, deductions, or allowances affect your overall tax position.