Salary sacrifice means you agree to take a lower salary and your employer spends the difference on something for you, usually a pension contribution, an electric car or a bike. Because your pay is lower, you pay less income tax and less National Insurance on it. For a basic rate taxpayer in England, Wales or Northern Ireland, putting £100 into a pension this way costs £72 of take-home pay. For a higher rate taxpayer it costs £58.
That NI saving is the whole point. Pay into a pension from your wages in the normal way and you get income tax relief but still pay NI on the full salary. Sacrifice the salary instead and the NI never arises in the first place, for you or for your employer.
How it works in practice
Your employment contract is changed so your cash salary goes down and a non-cash benefit goes up. Payroll then works out your tax, NI and any student loan repayment on the new, lower figure. Your payslip will usually show the reduced salary as your gross pay.
The change is meant to be a proper contract change, so most schemes only let you join, leave or change the amount at set times, such as once a year or when something significant happens in your life (a new baby, a house move, a change in hours). Your employer also can't let the sacrifice take your pay below the National Minimum Wage.
Pension salary sacrifice
This is the most common type, and the one that saves the most. Here's a £40,000 salary with 5% (£2,000) sacrificed into a pension, using 2026/27 rates.
| No sacrifice | £2,000 sacrificed | |
|---|---|---|
| Salary | £40,000 | £38,000 |
| Income tax | £5,486 | £5,086 |
| National Insurance | £2,194.40 | £2,034.40 |
| Take-home pay | £32,319.60 | £30,879.60 |
| Into your pension | £0 | £2,000 |
Take-home pay drops by £1,440, but £2,000 lands in the pension. You've saved £400 of income tax and £160 of NI. Your employer saves £300 of its own NI at 15%, and some employers pass that on by adding it to your pension.
The saving per pound depends on your band:
| Your income (England, Wales, NI) | Tax saved | NI saved | Cost of £100 in your pension |
|---|---|---|---|
| £12,570 to £50,270 | 20% | 8% | £72 |
| £50,270 to £100,000 | 40% | 2% | £58 |
| £100,000 to £125,140 | 60% | 2% | £38 |
| Over £125,140 | 45% | 2% | £53 |
The £100,000 to £125,140 row is where salary sacrifice really earns its keep. Sacrificing £10,000 of a £110,000 salary brings you back to £100,000, restores your full Personal Allowance and costs only £3,800 of take-home pay. Our guide to the 60% tax trap goes through that in detail.
For 2026/27 there's no limit on how much of a pension sacrifice is free of NI, other than the normal pension annual allowance (£60,000 for most people). The government plans to limit the NI-free part to £2,000 a year from April 2029. Above that, the sacrifice will still be free of income tax but NI will be charged on it.
Electric car schemes
With a car scheme your employer leases a car and you give up salary to cover the cost. For most benefits, the tax rules on salary sacrifice say you're taxed on whichever is higher: the salary you gave up or the normal taxable value of the benefit. Cars with emissions of 75g/km or less are exempt from that rule, which is why these schemes are almost all electric.
Instead you pay company car tax (benefit in kind) on the car. For a fully electric car the rate is 4% of the list price in 2026/27, rising to 5% in 2027/28.
Say the car has a list price of £40,000 and the lease costs £500 a month (£6,000 a year), sacrificed from a £60,000 salary:
- Income tax and NI saved on £6,000 at 42%: £2,520.
- Company car tax: 4% of £40,000 is £1,600, taxed at 40%, which is £640 a year.
- Net cost to you: £6,000 − £2,520 + £640 = £4,120 a year, or about £343 a month.
A basic rate taxpayer saves 28% on the £6,000 and pays 20% on the £1,600, so the same car costs £4,640 a year. Leases usually include insurance and servicing, but check what's covered and what happens if you leave the job early, as some schemes charge an early termination fee.
Cycle to work
Under the cycle to work scheme, your employer buys a bike and safety kit and hires it to you, and you repay the cost from your gross salary over a set period. Because the repayments come out before tax and NI, a basic rate taxpayer saves 28% of the cost and a higher rate taxpayer 42%. A £1,000 bike repaid over 12 months would cost a basic rate taxpayer £720 in take-home pay.
At the end of the hire you can usually hand the bike back, extend the hire, or buy it for a small fee. The terms vary by scheme provider, so read them before you sign.
The downsides
The lower salary is real, and it can bite in places you might not expect.
- Mortgages and borrowing. Some lenders base affordability on your contractual salary after sacrifice. If you're about to apply for a mortgage, ask the lender or broker how they treat it.
- Statutory Maternity Pay. The earnings-related part of SMP is worked out on your actual pay, so a big sacrifice can reduce it. Some employers top up or pause the scheme during leave, so ask.
- Life cover and salary-linked benefits. Death in service cover, pay rises given as a percentage, overtime rates and some pension contributions may be based on the lower salary unless your employer uses a "reference" or notional salary.
- State benefits and the State Pension. If sacrifice takes your pay below the NI Lower Earnings Limit, that year may not count towards your State Pension. This mainly affects part-time or lower-paid staff.
- Lock-in. You usually can't stop or change the amount whenever you like.
On the plus side, the lower salary also cuts student loan repayments (by 9% of the amount sacrificed if you're above your plan threshold) and can help with the High Income Child Benefit Charge.
See your own figures with the salary sacrifice calculator, or check the full payslip in the take-home pay calculator.
Last reviewed October 2026.