Glossary · UK

What is Salary Sacrifice?

Giving up part of your salary in exchange for non-cash benefits — saves tax and NI.

Full Definition

Salary sacrifice is an arrangement where an employee agrees to a reduction in their gross salary in exchange for a non-cash benefit (most commonly pension contributions, but also cycle-to-work, electric car schemes, childcare vouchers — though new childcare voucher schemes closed in 2018). Because the sacrificed amount never counts as taxable income, you save both Income Tax (20%/40%/45%) AND National Insurance (8%/2%). For a higher-rate taxpayer, a £1,000 salary sacrifice into pension costs only £580 in take-home pay but adds £1,000 to your pension pot. Note: salary sacrifice cannot reduce your pay below the National Minimum Wage.