Answers · UK 2025/26
What is salary sacrifice UK?
Salary sacrifice is an arrangement where you give up part of your gross salary and receive a non-cash benefit (typically pension, childcare, cycle-to-work or an electric car) instead. Because the sacrifice reduces your taxable pay, you pay less Income Tax and National Insurance — and so does your employer.
Full answer
How salary sacrifice works: you and your employer agree to reduce your gross salary, and the employer uses that saving to fund a benefit. Example — pension: on a £40,000 salary, sacrificing £3,000 into your pension reduces your taxable salary to £37,000. You pay Income Tax and NI on £37,000 instead of £40,000, saving 20% IT + 8% NI = 28% × £3,000 = £840 in tax and NI. Your employer also saves 15% employer NI on the sacrificed amount (£450). Common approved benefits: (1) Pension contributions — the biggest saving for most workers; (2) Childcare vouchers (legacy scheme closed, replaced by Tax-Free Childcare via government top-up); (3) Cycle to Work — up to £1,000 equipment tax-free; (4) Ultra-Low Emission Vehicles (ULEV/EV) — company car benefit in kind on EVs is just 2–3% in 2025/26, making this very tax-efficient; (5) Additional annual leave purchase. Limits: sacrificing below National Living Wage is not allowed; High Income Child Benefit Charge threshold is tested on adjusted net income, so salary sacrifice can also help preserve Child Benefit.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.