Salary sacrifice explained

What is salary sacrifice?

Salary sacrifice means giving up part of your gross (pre-tax) salary in exchange for a non-cash benefit — most commonly an employer pension contribution. Because you are taxed on the lower salary, you pay less Income Tax and often less National Insurance.

Pension sacrifice and the NI saving

When you sacrifice salary into a pension, the contribution is taken before both Income Tax and National Insurance. That makes it more efficient than paying the same amount from your take-home pay, because you also save the National Insurance you would otherwise pay on it.

Other schemes: tax-exempt vs NI-only

Some benefits — such as cycle-to-work — are exempt from both tax and NI. Others, under the post-2017 'optional remuneration' rules, save only National Insurance while you remain taxed on the amount given up. The salary calculator's advanced options let you model both treatments.

Trade-offs to watch

A lower gross salary can affect mortgage affordability assessments, statutory maternity or sick pay, and life cover based on salary. Sacrifice usually cannot take your pay below the National Minimum Wage. Weigh the tax saving against these effects.

One change is already scheduled: from 6 April 2029, only the first £2,000 of employee pension contributions made through salary sacrifice each year will be free of National Insurance. Contributions above that will attract employee and employer National Insurance like any other workplace pension contribution, though they stay free of Income Tax. Announced at the Autumn Budget in November 2025, it leaves most typical contributions unaffected.

Frequently asked questions

Sources

• gov.uk — Pension tax relief
• gov.uk — Expenses and benefits: salary sacrifice
• gov.uk — Cycle to work scheme: employer guidance
• gov.uk — National Minimum Wage and National Living Wage rates
• gov.uk — Workplace pensions: what you, your employer and the government pay
• gov.uk — Salary sacrifice reform for pension contributions from 6 April 2029

Related guides

• The UK tax year explainedWhy the tax year runs 6 April–5 April, and what 2026/27 changes.
• National Insurance bands explainedClass 1 NI thresholds and rates, and why NI works differently to Income Tax.
• Student loan plans comparedThresholds and rates for every UK student loan plan, side by side.