Salary Sacrifice UK 2025/26: How It Works and How Much You Save
Discover how salary sacrifice reduces your income tax and NI contributions through pension contributions, cycle to work, and childcare schemes.
What Is Salary Sacrifice?
Salary sacrifice (also known as salary exchange) is an arrangement where you agree to give up part of your gross salary in exchange for a non-cash benefit from your employer — most commonly pension contributions, but also cycle-to-work schemes, electric vehicle leasing, childcare vouchers, and more. Because the sacrifice reduces your contractual gross pay, both you and your employer pay less National Insurance — making it a win-win arrangement that is actively encouraged by HMRC.
How Salary Sacrifice Pension Contributions Work
Without salary sacrifice, if you earn £40,000 and contribute £3,000 to your pension from net pay, you claim 20% basic rate tax relief via your pension provider, giving you a £750 top-up. You've still paid National Insurance on the full £40,000.
With salary sacrifice, your contractual salary drops to £37,000. The £3,000 goes directly into your pension as an employer contribution. You pay both Income Tax and National Insurance on only £37,000 — saving NI as well as Income Tax.
Tax and NI Savings: 2025/26 Rates
| Who Saves | What They Save | Rate |
|---|---|---|
| Employee (basic rate) | Income Tax + Employee NI | 20% + 8% = 28% saving per £1 sacrificed |
| Employee (higher rate) | Income Tax + Employee NI | 40% + 2% = 42% saving per £1 sacrificed |
| Employer | Employer NI | 13.8% saving per £1 sacrificed |
Employer NI Sharing
Because employers save 13.8% employer NI on every pound sacrificed, many employers choose to pass some or all of this saving back to the employee — typically by increasing their pension contribution. For example, if you sacrifice £5,000, your employer saves £690 in NI. A generous employer might add that £690 to your pension pot, increasing your total pension contribution significantly at no extra cost to the employer.
This arrangement makes salary sacrifice one of the most tax-efficient ways to boost pension savings available to employees. Always ask your employer whether they pass on their NI savings.
Other Salary Sacrifice Benefits
- Cycle to Work: You can sacrifice salary to lease a bike and cycling equipment, typically saving 28–42% through tax and NI relief. The exemption covers bikes and safety equipment up to £1,000 (or more under some employer schemes). The bike must primarily be used for commuting.
- Electric Vehicle Leasing: Ultra-low Benefit-in-Kind rates (2% for 2025/26) on electric vehicles make EV salary sacrifice extremely attractive, particularly for higher rate taxpayers.
- Childcare: Tax-Free Childcare (up to £2,000 per child per year, with government topping up 20%) is now the primary childcare support scheme, though legacy childcare voucher schemes may still operate for those already enrolled.
- Additional Annual Leave: Some employers allow salary sacrifice in exchange for extra holiday days.
Important Considerations
Salary sacrifice reduces your contractual gross salary. Be aware that this can affect:
- Mortgage applications, which are typically assessed on gross income
- State benefit entitlements that are earnings-related (though pension sacrifice rarely affects this in practice for most earners)
- Life insurance and income protection premiums that are calculated as a multiple of salary
- Your salary must not fall below National Minimum Wage after sacrifice
Use our Salary Sacrifice Calculator to see exactly how much you could save →