Salary Sacrifice

How Salary Sacrifice Saves You Money

Salary sacrifice is an arrangement where you agree to reduce your gross salary in exchange for a non-cash benefit, most commonly pension contributions. Because your gross pay is reduced before tax and NI are calculated, you save both income tax and National Insurance on the sacrificed amount.

For a basic rate taxpayer, every £100 sacrificed saves £32 (20% tax + 12% NI). For a higher rate taxpayer, the saving is £42 (40% tax + 2% NI). This makes salary sacrifice significantly more efficient than making personal pension contributions, where you only reclaim income tax.

Salary sacrifice can also be used for childcare vouchers, cycle-to-work schemes, and electric car leases. The key limitation is that your reduced salary must remain above the National Minimum Wage. Try our salary sacrifice calculator.

How Salary Sacrifice Works in Practice

Salary sacrifice is an arrangement where you agree to a lower gross salary in exchange for a non-cash benefit — most commonly employer pension contributions. Because the sacrificed amount never counts as your income, you save both income tax and National Insurance on it. This makes salary sacrifice more tax-efficient than personal pension contributions.

Practical Tips

On a £40,000 salary, sacrificing £5,000 into your pension saves you approximately £1,400 in income tax (20%) and NI (8%) compared to receiving the cash. At the higher rate (40%), the savings are even greater — approximately £2,100 per £5,000 sacrificed. Salary sacrifice also reduces your reportable income, which can help retain benefits like child benefit (High Income Child Benefit Charge starts at £60,000). See salary sacrifice calculator.

Related Topics

Common salary sacrifice arrangements include pension contributions, cycle to work schemes, electric car leasing, and childcare vouchers (closed to new entrants but existing users continue). The sacrificed salary cannot take your pay below the National Minimum Wage.