How it works
In a salary sacrifice arrangement, you formally agree to a reduction in your contractual salary. Your employer redirects the sacrificed amount to a non-cash benefit — typically pension contributions, but also EV leases, cycle-to-work schemes, or (for legacy joiners) childcare vouchers.
Because the sacrificed amount never appears as your salary, it's never subject to:
- Income Tax at your marginal rate (20%, 40%, or 45%)
- Employee National Insurance (8% below the Upper Earnings Limit, 2% above)
- Employer National Insurance (15% above the Secondary Threshold)
The employer's NI saving is sometimes passed back to you in the form of higher pension contributions — common in tech and financial services, less so in smaller employers and the public sector.
The tax saving by band
The headline benefit varies by your income level:
- Basic rate (28% marginal): every £100 sacrificed costs you about £72 of take-home and adds £100 to your pension
- Higher rate (42% marginal): £100 sacrificed costs about £58 of take-home
- Inside the £100k–£125,140 taper (62% marginal): £100 sacrificed costs about £38 of take-home
This makes sacrifice exceptionally efficient for higher earners and anyone inside the personal allowance taper.
What to watch out for
Salary sacrifice reduces the salary used for:
- Mortgage applications — some lenders use post-sacrifice salary, which can reduce borrowing power
- Statutory pay (SMP, SSP, SPP) — these are calculated on average earnings after sacrifice
- Life cover and death-in-service — usually a multiple of salary, which may now be lower
- Student loan repayments — calculated on post-sacrifice salary, so repayments drop slightly
For a full walkthrough including worked examples and the £100k trap, see our salary sacrifice pension guide.