Salary sacrifice

Salary sacrifice is a contractual arrangement between you and your employer where you give up part of your gross salary in exchange for a benefit of equal value. The benefit is paid directly by the employer, so the sacrificed amount never counts as taxable pay.

The saving comes from National Insurance, not income tax. Sacrificed income escapes both employee NI (8%/2%) and employer NI (15% above £5,000). Pension contributions already get income tax relief regardless of route — but under salary sacrifice, you also dodge NI on the sacrificed amount. Most good employers pass the employer NI saving back into your pension too, making the scheme materially better than paying in from net salary.

Common sacrifice benefits: workplace pensions (the largest category by far), electric-vehicle lease schemes (very tax-efficient thanks to low BIK rates), cycle-to-work, childcare vouchers (closed to new entrants since 2018), and additional holiday purchase.

Catches: sacrifice reduces your gross salary for mortgage and loan affordability checks, for statutory maternity/paternity pay calculations, for life-cover multiples, and for earnings-linked benefits. Your reduced salary must also stay above National Minimum Wage — you can't sacrifice below it.

Ltd directors don't typically use salary sacrifice in the same way. Direct company pension contributions are already a Corporation Tax deduction for the company and count as employer contributions for the director — simpler, and effectively achieves the same outcome.

Related terms

• Annual Allowance (pension) — The maximum you can contribute to pensions each year with tax relief — £60,000 for 2026-27, tapered for high earners.
• Personal Allowance — The first slice of income you can earn tax-free each year — £12,570, frozen until April 2031.
• Tax code — The code HMRC gives your employer so they know how much of your pay is tax-free under PAYE.