Salary Sacrifice Explained, How It Works in the UK

What Salary Sacrifice Is

Salary sacrifice is a formal change to your employment contract. You agree with your employer to give up a portion of your gross cash salary in exchange for a non-cash benefit, typically a pension contribution, a company electric car, cycle-to-work equipment or a technology package. HMRC approves this arrangement, and the tax savings arise because income tax and National Insurance are both calculated on your reduced gross salary, not on the original figure.

The key word is formal. A salary sacrifice arrangement must genuinely amend your employment contract, it is not simply a request to have your pension contribution handled differently. HMRC scrutinises arrangements that appear to allow flexible switching in and out at will, since that would resemble a salary supplement rather than a genuine contract change. Most employers set specific windows for joining or altering the scheme.

How the Mechanics Work

Under salary sacrifice, your contractual gross salary reduces by the sacrifice amount. Your employer then provides the benefit, usually by paying the pension contribution directly, or by leasing a car and making it available to you. Because your gross salary is lower, PAYE income tax is assessed on a smaller figure, and employee National Insurance contributions are assessed on a smaller figure too.

Your employer also benefits: employer NI (15% in 2026/27 on earnings above £5,000) is calculated on your reduced salary, saving the employer money on every pound sacrificed. This employer NI saving is real cash, it is not simply redistributed to you automatically, but many employers pass some or all of it back as additional pension contributions or enhanced scheme terms. The net effect is that a £1,000 salary sacrifice typically costs a basic-rate employee only around £720 in reduced take-home pay, because the income tax and NI savings absorb the rest.

What Benefits Can Be Salary Sacrificed

HMRC permits salary sacrifice for a range of benefits. Pension contributions are the most common and most valuable, the employee and employer NI savings make them significantly more efficient than standard pension contributions. Company electric vehicles are highly tax-efficient thanks to the low BIK rate (4% for zero-emission cars in 2026/27). Cycle-to-work equipment is fully exempt from BIK tax, so the entire sacrifice is a tax saving with no offsetting charge. Technology packages (phones, laptops) can also qualify in some schemes.

What cannot be salary sacrificed: cash bonuses once they have been paid (though a pre-payment election to sacrifice a forthcoming bonus is possible under specific rules), contractual overtime pay, and any benefit that is itself cash or a cash voucher. Childcare vouchers closed to new entrants in October 2018 and are no longer available for new joiners, though existing members of grandfathered schemes may still be receiving them.

Important Considerations Before You Sacrifice

The reduced gross salary created by sacrifice affects several other calculations that use salary as an input. Mortgage lenders may assess affordability on your contractual (post-sacrifice) salary, if you are planning to apply for a mortgage in the near term, discuss this with a mortgage broker before altering your sacrifice level. Some lenders accept a letter from your employer confirming the true gross pay, but others simply use the P60 figure.

Statutory Maternity Pay (SMP) and Statutory Paternity Pay are both calculated on average earnings. If your salary is reduced by sacrifice during the relevant reference period (typically the 8 weeks before the 25th week of pregnancy for SMP), your statutory entitlement may be lower. Some employers top up statutory payments to full salary, rendering this moot, but check your employer's policy before committing to a sacrifice that spans a period near a planned or possible maternity leave.