Salary Sacrifice Explained: How to Pay Less Tax

Most people I speak to about salary sacrifice have either never heard of it or vaguely remember HR mentioning it during onboarding. Which is a shame, because it’s one of the simplest ways to legally reduce the amount of tax and National Insurance you pay. And it’s been available to most employees for years.

I used salary sacrifice for years before I left employment. It saved me thousands. The concept is straightforward, but the impact on your take-home pay (in a good way) can be significant if you set it up properly.

What is salary sacrifice?

Salary sacrifice is an arrangement where you agree to give up part of your gross salary in exchange for a non-cash benefit from your employer. The key word here is gross. The sacrifice happens before tax and National Insurance are calculated on your pay.

Because your taxable salary is now lower, you pay less income tax and less National Insurance. Your employer also pays less employer’s National Insurance, which is why most companies are happy to offer it.

It’s completely legal. HMRC allows it. Your employer facilitates it. You benefit from it. Everyone wins.

Pension salary sacrifice (the big one)

The most common and valuable form of salary sacrifice is pension contributions. Instead of paying into your workplace pension from your net pay (after tax), your employer redirects part of your gross salary straight into your pension before any deductions.

This means you save on both income tax and National Insurance contributions. If you’re making pension contributions the normal way (through relief at source), you only get the income tax back. With salary sacrifice, you keep the NI saving too.

For a basic rate taxpayer, that’s an extra 8% saving on every pound you sacrifice. For higher rate taxpayers, the NI saving is 2%, but combined with 40% tax relief, the overall efficiency is hard to beat.

Worked example

Let’s say you earn £50,000 a year and you want to put £500 a month into your pension.

Without salary sacrifice (relief at source):

£500 comes from your net pay
You get 20% tax relief added to the pension (£125), so £625 goes into your pot
But you’ve already paid National Insurance on that £500
Total NI cost to you: £40/month (at 8%)

With salary sacrifice:

Your gross salary drops by £500/month to £49,400 equivalent
The full £500 goes into your pension before tax or NI
You save income tax: £100/month (at 20%) or £200/month (at 40%)
You save National Insurance: £40/month (at 8%)
Total monthly saving: roughly £140 to £240 depending on your tax band

Over a year, that’s £1,680 to £2,880 more in your pocket (or your pension) simply by changing how the contribution is made. The money going into your pension is the same. You just pay less tax getting it there.

If you’re a higher rate taxpayer on £50,000 or above, salary sacrifice is almost always worth it for pension contributions. The savings are too significant to ignore.

Other salary sacrifice options

Pensions get the most attention, but there are other benefits you can sacrifice salary for:

Cycle to Work scheme. You can get a bike and accessories tax-free through salary sacrifice. The saving is typically 32% to 42% off the retail price depending on your tax bracket. If you commute by bike or want to start, this is a no-brainer.

Electric car scheme. This has become increasingly popular. You lease an electric vehicle through salary sacrifice and benefit from very low Benefit in Kind (BIK) rates (currently 2% for fully electric cars). For higher rate taxpayers, the savings can be substantial compared to buying or leasing privately.

Childcare vouchers. These were closed to new applicants in October 2018, but if you’re already enrolled, you can continue to use salary sacrifice for childcare costs. For those still on the scheme, it provides up to £243 per month tax-free for basic rate taxpayers.

Technology schemes. Some employers offer salary sacrifice for laptops, phones, or other tech. The savings are smaller here, but still worth checking.

Who benefits most?

Higher rate taxpayers get the biggest advantage from salary sacrifice. If you earn above £50,270 (the higher rate threshold for 2025/26), every pound you sacrifice saves you 40% income tax plus 2% NI. That’s 42p saved per pound.

Basic rate taxpayers still benefit, saving 20% income tax plus 8% NI (28p per pound). It’s not as dramatic, but it adds up over the course of a year.

If you’re earning close to the higher rate threshold, salary sacrifice can actually bring your taxable income below £50,270, which means you avoid higher rate tax on the portion above the threshold. This is a legitimate and sensible tax planning strategy.

What to watch out for

Salary sacrifice isn’t without trade-offs. Here’s what you need to consider:

Mortgage applications. Lenders look at your gross salary. If you’ve sacrificed £6,000 a year into your pension, your official salary is £6,000 lower. Some lenders understand salary sacrifice and will use your pre-sacrifice salary, but not all. If you’re applying for a mortgage soon, check with your broker first.

Statutory pay. Statutory maternity pay, statutory sick pay, and other statutory benefits are calculated on your actual (post-sacrifice) salary. If your salary drops below the lower earnings limit (£123 per week in 2025/26), you could lose entitlement to these benefits entirely.

Student loan repayments. Your student loan repayments are based on your post-sacrifice salary. This means salary sacrifice can reduce your student loan payments. Whether that’s a benefit or a drawback depends on your repayment plan and whether you expect to repay in full.

Death in service and other benefits. Some employer benefits like life insurance (death in service) are calculated as a multiple of your salary. A lower salary means a lower payout. Check your specific scheme.

How to set it up

This part is easier than you’d think.

Check if your employer offers it. Most medium and large employers do. Ask HR or your payroll department.
Decide how much to sacrifice. Work out your budget and decide what amount makes sense. Don’t sacrifice so much that your take-home pay can’t cover your bills.
Complete the paperwork. Your employer will usually have a form or online process. You’ll need to formally agree to reduce your salary.
Check your payslip. After the arrangement starts, verify that your gross pay has reduced and that the benefit (pension contribution, car lease, etc.) appears correctly.

If your employer doesn’t currently offer salary sacrifice, it’s worth asking. The setup cost for them is minimal and they save on employer’s NI too, so there’s a genuine incentive on both sides.

Is salary sacrifice worth it?

For most employed people, especially those paying into a workplace pension, salary sacrifice is one of the easiest financial wins available. You’re not changing what you save or how you invest. You’re simply changing the mechanics of how the money moves, and keeping more of it in the process.

If you haven’t looked into whether your employer offers salary sacrifice, do it this week. A single conversation with HR could save you over a thousand pounds a year.

Salary Sacrifice Explained: How to Pay Less Tax Legally