What is salary sacrifice?

With salary sacrifice, your contractual pay is reduced and your employer provides a benefit instead. The most widespread use is pension: you agree to lower your salary and your employer pays the equivalent amount into your workplace pension. That contribution is not subject to Income Tax or employee National Insurance on the sacrificed amount, and your employer also saves employer National Insurance.

For 2026/27, the Personal Allowance remains £12,570 and employee National Insurance is charged at 8% on earnings between £12,570 and £50,270 (primary threshold and upper earnings limit). Sacrificing salary below those thresholds reduces both tax and NI, which is why pension salary sacrifice is often more efficient than receiving the money as pay and contributing yourself.

Salary sacrifice can also apply to approved schemes such as cycle-to-work, childcare vouchers (where legacy schemes still exist) and electric company cars with low benefit-in-kind rates. Each scheme has its own rules, and the benefit must be set up through your employer — you cannot salary-sacrifice informally.

There are trade-offs. A lower salary can affect mortgage affordability, Statutory Maternity Pay calculations and life insurance based on salary multiples. Some employers use a 'salary sacrifice arrangement' that protects maternity pay. Check your contract, pension scheme rules and whether sacrificed amounts still count towards the £60,000 pension annual allowance for 2026/27.