Salary sacrifice is a formal arrangement where you agree to a lower contractual salary in exchange for a benefit in kind (typically a pension contribution, EV lease, or childcare). Because the sacrifice happens before income tax and National Insurance are calculated, both you and your employer save.
How salary sacrifice saves tax
Ordinary pension contributions get income tax relief but not NI relief — you pay employee NI on the gross salary before you contribute. Salary sacrifice skips the contribution off your gross pay entirely, so you never pay NI on it in the first place.
Pension salary sacrifice
The most common and most generous form. Instead of a 5% employee pension contribution from your £40,000 salary, you sacrifice £2,000 of salary and your employer contributes that plus their own 3%. You pay no income tax, no employee NI, and your employer saves £300 of their NI bill (some pass this back to boost your pension further).
- Watch out for the £50,270 higher-rate threshold — sacrificing just enough to drop below it saves the extra 20% tax on every £1 sacrificed.
- The £100,000 Personal Allowance taper is a hidden 60% effective tax rate between £100k–£125,140. Salary sacrifice down to £100k gives extraordinary effective savings.
- The £60,000 child benefit clawback hits sole earners — sacrificing salary below £60k preserves the full benefit.
- Model all of this in the pension contribution calculator.
Electric vehicle (EV) salary sacrifice
Since 2020 the Benefit-in-Kind (BIK) rate on electric cars has been very low, making EV salary sacrifice schemes one of the cheapest ways to drive a new electric car.
| Tax year | Electric car BIK rate |
|---|---|
| 2024/25 | 2% |
| 2025/26 | 3% |
| 2026/27 | 4% |
| 2027/28 | 5% |
| 2028/29 | 7% |
On a £45,000 Tesla Model Y with 3% BIK, a 40% higher-rate taxpayer pays £540/year tax on a benefit worth ~£10k+ including running costs. The BIK rate is rising but still beats conventional ownership or PCP comfortably.
- Lease covers insurance, servicing, breakdown, tyres — so your net monthly sacrifice is a total-cost figure.
- Leaving the employer usually means returning the car (sometimes with an early-termination fee).
- Works best for 40% taxpayers — basic-rate savings are smaller.
- Charging at home is cheap; charging at work (if free) is a tax-free benefit.
Other common schemes
Besides pensions and EVs, common salary sacrifice benefits include:
- Cycle-to-work — up to ~£3,000 of bike + accessories, typically 40% net saving over 12 months.
- Workplace nursery — currently unlimited tax/NI free if genuinely run by/for the employer.
- Technology schemes — some employers still offer phones, laptops under formal arrangements.
- Holiday-buying — sacrifice a day's pay for a day's extra annual leave. Neutral for tax, but useful for budget/balance.
The catch: lower contractual salary
Your contractual salary is now the post-sacrifice amount. That affects:
- Mortgage applications — most UK lenders use the gross-before-sacrifice figure if you supply a payslip showing it clearly, but some don't. Ask your broker.
- Statutory payments — SMP, SSP, redundancy pay may be based on the lower salary.
- Life cover / income protection — some group schemes base cover on the post-sacrifice figure. Check.
- Minimum wage floor — you cannot sacrifice yourself below the National Living/Minimum Wage.
- Pension Lifetime Allowance — now abolished, but the Lump Sum Allowance (£268,275) can still constrain very high pension pots.