Practise salary sacrifice calculations: NI savings for employee and employer, net cost of pension contributions, and cycle-to-work scheme examples.
Salary sacrifice (also called salary exchange) is an arrangement where an employee agrees to give up part of their gross salary in exchange for a non-cash benefit provided by the employer -- most commonly pension contributions or a cycle-to-work scheme. The key financial advantage is that salary sacrifice reduces the employee's gross pay, which means both the employee and the employer pay less National Insurance on the sacrificed amount. For 2026/27, employee NI is 8% on earnings between GBP 12,570 and GBP 50,270, and 2% above GBP 50,270. Employer NI is 15% on earnings above the secondary threshold (GBP 5,000). A basic-rate taxpayer sacrificing GBP 1,000 of salary into pension saves: income tax of GBP 200 (20%); employee NI of GBP 80 (8%); and the employer saves GBP 150 of employer NI (15%). The total saving is GBP 430 for a GBP 1,000 pension contribution -- making the net cost just GBP 570. Employers often pass on some or all of their NI saving to the employee's pension (employer NI rebate). This drill tests: calculating the employee NI saving on a sacrifice; calculating the employer NI saving; and working out the net effective cost of a pension contribution through salary sacrifice vs personal contribution. Cycle to work schemes allow tax and NI-free provision of a bicycle and equipment worth up to GBP 1,000 (GBP 1,500 for cargo bikes) through salary sacrifice.
Salary sacrifice is a formal arrangement where an employee agrees to give up a portion of their gross contractual salary in exchange for a non-cash benefit of equal value provided by the employer -- most commonly employer pension contributions or a cycle-to-work scheme. Because the employee's gross salary is reduced, both the employee and employer pay less National Insurance on the sacrificed amount, and the employee also pays less income tax. The employment contract must be formally amended to reflect the new lower salary.
The employee NI saving depends on the employee's earnings band. If the sacrifice reduces earnings within the range GBP 12,570 to GBP 50,270, the saving is 8% of the sacrificed amount. If the sacrifice reduces earnings above GBP 50,270 (the upper earnings limit), the saving on that portion is 2%. For example, a basic-rate taxpayer sacrificing GBP 1,000 saves GBP 80 in employee NI (8% x GBP 1,000), in addition to the income tax saving.
Employers pay NI at 15% (2026/27) on employee earnings above the secondary threshold (GBP 5,000 per year). Any salary sacrifice that reduces the employee's earnings below the secondary threshold saves 15% of only the amount above that threshold. For earnings well above GBP 5,000 (as is typical), the employer saving is simply 15% of the full sacrifice amount. On a GBP 5,000 salary sacrifice, the employer saves GBP 750. Many employers pass this saving directly to the employee's pension pot.
Salary sacrifice reduces your pensionable earnings and the National Insurance contributions made. However, State Pension entitlement is based on qualifying NI years (you need 35 years for a full State Pension), not on the amount of NI paid. So salary sacrifice generally does not affect State Pension entitlement unless the sacrifice reduces your earnings below the lower earnings limit (GBP 6,396 for 2026/27), which is the threshold below which a qualifying year is not earned. Most salary sacrifice arrangements keep earnings well above this level.
Yes -- salary sacrifice can be used for several other benefits: cycle to work schemes (up to GBP 1,000, or GBP 1,500 for cargo/adapted bikes); electric and ultra-low emission vehicles (company cars with emissions under 75g/km attracting low benefit-in-kind tax); and some employer technology loan schemes. Childcare vouchers are now closed to new entrants (replaced by Tax-Free Childcare). All reduce gross salary and therefore save income tax and NI for both employee and employer on the sacrificed amount.
When you sacrifice GBP 200/month of gross salary: income tax saving = GBP 40 (20% of GBP 200); employee NI saving = GBP 16 (8% of GBP 200). Net cost to employee = GBP 200 - GBP 40 - GBP 16 = GBP 144 per month in reduced take-home pay, for a GBP 200 pension contribution. The employer also saves GBP 30 in employer NI (15% of GBP 200), which some employers add to the pension contribution as well, potentially making it GBP 230 going into the pension at a net cost of GBP 144.
Salary sacrifice reduces the gross salary shown on your payslips, because your contractual salary has been formally reduced. Many mortgage lenders assess affordability based on the gross salary on your payslips, which means a large salary sacrifice arrangement could reduce your maximum borrowing. Some lenders will add back salary sacrifice deductions when calculating affordability if they can see this on the payslip. It is important to discuss this with a mortgage adviser before significantly increasing a salary sacrifice arrangement if you are planning to apply for a mortgage.
Generally no -- salary sacrifice is a formal change to your employment contract, not a voluntary payroll deduction. To exit the arrangement, you and your employer must agree to formally amend the contract back to your original salary. Most employers allow changes at specific trigger points such as significant life events (marriage, birth of a child, divorce), during annual open window periods, or on giving a period of notice. Outside these windows, you are typically contractually bound to continue the sacrifice for the agreed period.
Practise finding percentages, percentage change and reverse-percentage problems …
Practise adding 20% VAT, removing VAT from gross prices and working with the 5% …
Build intuition for how compound interest grows savings and debts over time with…
Practise calculating UK Income Tax manually using the 2026/27 bands for England,…
Practise converting GBP to EUR, PLN, UAH and RON using realistic exchange rates.…
Practise calculating Class 1 employee National Insurance using 2026/27 threshold…