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.
How Salary Sacrifice is calculated
Sacrificed pay is removed before tax AND NI:
New taxable pay = Gross - Sacrifice
Saving = Sacrifice x (Income Tax rate + employee NI rate)- Sacrifice
- Amount of salary given up (e.g. into a pension).
- Income Tax rate
- 20% / 40% / 45% depending on your band.
- employee NI rate
- 8% below the Upper Earnings Limit, 2% above (2026/27).
Worked example: A higher-rate employee sacrificing GBP 5,000 into a pension saves 5,000 x (40% + 2%) = GBP 2,100 in tax and NI, so the GBP 5,000 pension contribution costs them only GBP 2,900 of take-home pay.