Salary Sacrifice
An arrangement where you give up part of your salary in exchange for a non-cash benefit (e.g., extra pension), saving tax and NI.
Key Points
- ✓Exchange salary for tax-efficient benefits
- ✓Saves both Income Tax and National Insurance
- ✓Employer also saves National Insurance (often passed on)
- ✓Common for pensions, childcare, cycle-to-work, electric cars
- ✓Cannot reduce salary below National Minimum Wage
Detailed Explanation
Salary Sacrifice is an arrangement where you agree to give up part of your salary in exchange for a non-cash benefit from your employer. Common benefits include additional Pension Contribution, childcare vouchers, cycle-to-work schemes, and electric cars.
The key advantage is that both you and your employer save National Insurance on the sacrificed amount, and you save Income Tax too. For Higher Rate Tax payers, this can mean savings of over 40% on the sacrificed amount.
For Pension Contribution via Salary Sacrifice, your employer pays the contribution directly to your pension. This means National Insurance is saved on both sides - you save employee National Insurance and your employer saves employer National Insurance (often passed on as extra pension contribution).
However, Salary Sacrifice reduces your gross salary, which could affect mortgage applications, statutory pay calculations (like Maternity Pay), and your earnings record for certain benefits.
You cannot reduce your salary below the National Minimum Wage through Salary Sacrifice. Any arrangement must be properly documented and cannot be changed more frequently than once per year in most cases.
Practical Examples
- •Sacrificing £5,000 into pension: You save £1,000 Income Tax (20%) + £400 National Insurance (8%) = £1,400. Your employer might add their 13.8% NI saving (£690) to your pension too
- •A Higher Rate Tax payer sacrificing £10,000 saves: £4,000 Income Tax (40%) + £200 National Insurance (2%) = £4,200 - plus potential employer NI passed on
- •Electric car via Salary Sacrifice with 2% Benefit in Kind (BIK) rate: £400/month lease costs effectively £280/month after tax savings for a Basic Rate Tax payer
Frequently Asked Questions
Related Terms
Pension Contribution
Money paid into your pension pot, receiving tax relief at your marginal rate (20%, 40%, or 45%), up to the annual allowance.
National Insurance (NI)
Mandatory contributions that fund State benefits including the State Pension, charged at different rates for employees, employers, and self-employed.
Income Tax
A progressive tax on your earnings, charged at 20%, 40%, or 45% depending on your income level (after personal allowance).
Benefit in Kind (BIK)
Non-cash benefits provided by your employer (e.g., company car) that are subject to Income Tax and National Insurance.
Higher Rate Tax
Income Tax charged at 40% on income between £50,271 and £125,140 (2024/25).