How does salary sacrifice reduce National Insurance?

Full answer

**Salary sacrifice** (also called salary exchange) is a formal arrangement where you give up part of your contractual salary in exchange for a non-cash benefit — most commonly employer pension contributions, electric vehicles, or cycle-to-work schemes. **Why it reduces NI — the mechanism:** Because the sacrifice reduces your gross salary before any tax or NI is calculated, both the employee and employer save NI on the sacrificed amount. **NI savings example — £5,000 pension sacrifice:** | NI payer | Rate | Saving | |---|---|---| | Employee NI (8% basic rate band) | 8% | **£400** | | Employer NI (15% above £5,000 ST) | 15% | **£750** | | **Total NI saved** | — | **£1,150** | **Employer passing on savings:** Employers are not legally required to pass on their NI saving — but many do (especially for pension salary sacrifice), meaning the employer saving goes into the pension pot or is shared as additional employer contribution. **Income tax also saved:** Alongside NI, salary sacrifice also reduces the income you pay income tax on — so a basic rate taxpayer sacrificing £5,000 saves an additional £1,000 in income tax. **National Minimum Wage floor:** Salary sacrifice cannot reduce your cash salary below the **National Living Wage** (£12.71/hour for 21+). Employers must monitor this, especially for lower-paid workers. **Benefits where salary sacrifice applies:** - Employer pension contributions - Electric vehicles (OpRA-exempt for EVs with CO2 0g/km) - Cycle-to-work schemes - Childcare (legacy schemes only — TC replaced by Tax-Free Childcare) - Ultra-low emission vehicles

Try the calculator

Related guides

• Pension Contribution Guide