Salary Sacrifice and Tax on Savings, Dividends and Capital Gains
Written by James Whitfield · Last reviewed 19 October 2026 · Checked against GOV.UK guidance for 2026/27.
Salary sacrifice lowers your salary, and your salary decides how much of the basic-rate band is left for everything else. If you have savings interest, dividends or a capital gain, a sacrifice that brings you back under £50,270 can cut the tax on those too. Here is how each one works, with 2026/27 figures.
Yes, it can. HMRC works out your tax band by adding your interest and dividends to your other income, and gains are added on top of your taxable income.123 If salary sacrifice keeps the total within the basic-rate band, you get the £1,000 Personal Savings Allowance instead of £500, dividends are taxed at 10.75% instead of 35.75%, and gains at 18% instead of 24%. Someone earning £70,000 who sacrifices £35,000 and has £2,000 of interest pays £200 tax on it instead of £600.
- Personal Savings Allowance: £1,000 basic rate, £500 higher rate, £0 additional rate.1
- Starting rate for savings: up to £5,000 of interest tax-free, reduced £1 for every £1 of other income above the £12,570 Personal Allowance.1
- Dividends: £500 allowance, then 10.75% basic rate, 35.75% higher rate, 39.35% additional rate.2
- Capital Gains Tax: £3,000 annual exempt amount, then 18% within the basic-rate band and 24% above it.3
- Basic-rate band: income up to £50,270 with the standard Personal Allowance.4
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Why a lower salary changes the tax on other income
HMRC adds your interest and dividends to your other income to decide which band they fall in, and adds taxable gains on top of your taxable income for Capital Gains Tax.123 So the more of the basic-rate band your salary uses, the less is left for them. A salary sacrifice is a real reduction in your contractual pay, so your taxable pay, and the band it uses up, both fall.5 The space it frees is then available for interest, dividends and gains.
That is a bonus on top of the main saving: the Income Tax and National Insurance on the sacrificed salary itself, which the salary sacrifice calculator works out.
Savings interest: the £1,000 allowance
Your Personal Savings Allowance depends on your band, and HMRC finds your band by adding all your interest to your other income.1
| £70,000 salary, £2,000 of interest | |
| No sacrifice: income £72,000, higher rate, allowance £500 | £1,500 × 40% = £600 |
| £35,000 sacrifice: income £37,000, basic rate, allowance £1,000 | £1,000 × 20% = £200 |
| Less tax on the interest | £400 |
England, Wales and Northern Ireland rates, no other income.14
The starting rate for savings only helps people whose other taxable income ends up below £17,570, for example a part-time worker who sacrifices into a pension. On £16,000 of wages, the £3,430 above the Personal Allowance cuts the £5,000 starting rate to £1,570.1
Dividends: 10.75% instead of 35.75%
To find your dividend tax band, you add your dividends to your other income. The first £500 is covered by the dividend allowance.2
| £55,000 salary, £4,000 of dividends | |
| No sacrifice: all dividends above £50,270; £3,500 × 35.75% | £1,251.25 |
| £10,000 sacrifice: salary £45,000, dividends fit below £50,270; £3,500 × 10.75% | £376.25 |
| Less dividend tax | £875 |
2026/27 dividend rates from GOV.UK.2 The £500 allowance still uses up band space.
Capital gains: more taxed at 18%
For Capital Gains Tax you add your taxable gains, after the £3,000 annual exempt amount, to your taxable income. The part that fits within the £37,700 basic-rate band is taxed at 18% and the rest at 24%.3
| £55,000 salary, £20,000 gain (£17,000 after the exempt amount) | |
| No sacrifice: taxable income £42,430, band used up; £17,000 × 24% | £4,080 |
| £10,000 sacrifice: taxable income £32,430, £5,270 of band left; £5,270 × 18% + £11,730 × 24% | £3,763.80 |
| Less Capital Gains Tax | £316.20 |
Salary and gain in the same tax year, no other income.34
How to plan it
- Add up your income for the tax year: salary, bonus, taxable benefits, interest outside ISAs, dividends and any gains.
- Find the gap to £50,270 (or £100,000 or £125,140 if you are higher up). The thresholds guide shows the sacrifice needed for each.
- Check the sacrifice is allowed: within the annual allowance and above the minimum wage floor (how much can you sacrifice).
- Time it before the money arrives. A salary or bonus sacrifice must be agreed before you are entitled to the pay; see bonus sacrifice.
Frequently asked questions
If I salary sacrifice down to the basic rate, do I get the £1,000 Personal Savings Allowance?
Yes, if your total income including the interest is within the basic-rate band. HMRC works out your band by adding your interest to your other income, and salary sacrifice lowers your salary. Basic-rate taxpayers get £1,000, higher-rate £500 and additional-rate nothing.
I earn £70,000 and sacrifice £35,000. Am I a higher-rate taxpayer for savings?
Not if your total income after the sacrifice, including interest, is £50,270 or less. With £2,000 of interest your income is £37,000, so you are a basic-rate taxpayer: £1,000 of interest is tax-free and the rest is taxed at 20% (£200), instead of £600 as a higher-rate taxpayer.
Does salary sacrifice lower my dividend tax?
It can. Dividends are added on top of your other income, so a lower salary leaves more of the basic-rate band for them. In 2026/27 dividends are taxed at 10.75% in the basic-rate band and 35.75% in the higher-rate band, after the £500 dividend allowance.
Does salary sacrifice reduce Capital Gains Tax?
It can for basic-rate band space. Gains are added to your taxable income: the part within the £37,700 basic-rate band is taxed at 18% and the rest at 24%, after the £3,000 annual exempt amount. A lower salary leaves more band for gains.
Can salary sacrifice get me the £5,000 starting rate for savings?
Only if your other taxable income ends up below £17,570. Every £1 of other income above the £12,570 Personal Allowance reduces the £5,000 starting rate by £1.
This guide is general information, not financial or tax advice. Examples use England, Wales and Northern Ireland bands and assume no other income. If you live in Scotland, ask a tax adviser how the bands interact. Check large gains with a tax adviser.
Sources & references
Every headline figure in this guide is checked against the official HMRC and GOV.UK pages below and reflects the confirmed 2026/27 tax year. Each link opens the relevant official page in a new tab.
- Tax on savings interest: how much is tax free ↗ https://www.gov.uk/apply-tax-free-interest-on-savings/how-much-is-tax-free
- Tax on dividends ↗ https://www.gov.uk/tax-on-dividends
- Capital Gains Tax rates and allowances ↗ https://www.gov.uk/capital-gains-tax/rates
- Income Tax rates and Personal Allowances ↗ https://www.gov.uk/income-tax-rates
- Salary sacrifice and the effects on PAYE (HMRC) ↗ https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye