Salary Sacrifice: Tax and National Insurance Savings Explained
Salary sacrifice is an agreement to reduce your gross salary in exchange for a non-cash benefit of equal value. Because National Insurance and income tax apply to your new lower salary, you save on both — typically 32–42p per £1 sacrificed, depending on your tax band. Employers also save employer NI (13.8%), and often share part of that saving with you.
How the Saving Works
Saving per £1 sacrificed: Basic rate taxpayer (20% IT + 8% NI* = 28% combined): Save: £0.28 per £1 sacrificed Higher rate taxpayer (40% IT + 2% NI = 42% combined): Save: £0.42 per £1 sacrificed *Employee NI rates from 2024/25: 8% on earnings £12,570–£50,270; 2% above Employer NI saving: 13.8% on the sacrificed amount (often shared with employee as enhanced pension contribution)
Common Salary Sacrifice Schemes
| Scheme | What You Get | Annual Limit | Typical Saving |
|---|---|---|---|
| Pension | Higher pension contribution | £60,000 (annual allowance) | 28–42% of sacrificed amount |
| Cycle to Work | Bike + equipment | No cap (employer sets) | 28–42% of bike cost |
| Electric vehicle | EV via lease | P11D value × BIK% | Varies — see below |
| Childcare vouchers | Now closed to new entrants | — | — |
| Tech scheme | Laptops, phones | Employer-set | 28–42% |
What-If Scenarios
Scenario 1: Additional pension contribution via salary sacrifice
Higher rate taxpayer, £5,000 additional annual pension sacrifice
| Item | Amount |
|---|---|
| Gross salary reduction | £5,000 |
| Income tax saved (40%) | £2,000 |
| Employee NI saved (2%) | £100 |
| Net cost to you | £2,900 |
| Pension receives | £5,000 |
| Employer NI saved (13.8%) | £690 (may add to pension) |
Scenario 2: Electric vehicle lease
EV list price £45,000, BIK rate 3% (2025/26), basic rate taxpayer
| Item | Amount |
|---|---|
| Lease cost per month | £650 |
| Salary sacrificed per month | £650 |
| Tax + NI saved (28%) | £182/month |
| BIK tax liability (£45k × 3% × 20% ÷ 12) | £22.50/month |
| Effective monthly cost | £490.50 |
Scenario 3: Impact on mortgage affordability
Salary sacrifice reduces your gross salary — lenders assess affordability on the sacrificed amount. A £40,000 salary with £5,000 pension sacrifice may be assessed as £35,000 for mortgage purposes. Plan accordingly before applying.
Frequently Asked Questions
→ Calculate your take-home pay with the Salary Take-Home Calculator
Indicative only. Tax treatment of salary sacrifice depends on scheme structure and individual circumstances. Consult your employer's HR or a tax adviser.