Salary sacrifice explained: saving tax on workplace benefits
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Quick answer: Salary sacrifice means giving up part of your salary in exchange for a benefit — usually pension contributions, an electric car, or cycle-to-work scheme — saving Income Tax and National Insurance on the sacrificed amount.
Salary sacrifice is a tax-efficient way to receive workplace benefits. You agree to reduce your gross salary, and your employer provides a benefit instead. Because the sacrificed amount is not salary, you save Income Tax and National Insurance on it — and your employer saves NI too.
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Read the full work & self-employment guide →Primary source: www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye
How salary sacrifice works
You agree to reduce your gross salary by a set amount. Your employer provides a benefit — pension top-up, car lease, or bike — instead of paying you that amount as cash.
Because your taxable income is lower, you pay less Income Tax and NI. On a £2,000 annual sacrifice, a basic-rate taxpayer saves about £400 in tax and NI.
Common salary sacrifice schemes
Pension: the most popular use. Sacrificed amounts go directly into your pension with full tax relief. Employer NI savings may be added too.
Electric vehicles: salary sacrifice car schemes offer EVs at a fraction of the personal lease cost through tax savings.
Cycle to work: borrow up to £3,000 for a bike and accessories, repaid through salary sacrifice over 12–18 months.
Things to watch
A lower gross salary can reduce mortgage affordability — lenders assess your sacrificed salary, not your pre-sacrifice amount.
Salary sacrifice below the NI threshold may reduce your NI credits, potentially affecting state pension entitlement if you sacrifice a large proportion of income.
Common questions
Can I salary sacrifice into my pension?
Yes. Pension salary sacrifice is the most common form. Your employer deducts the amount before tax and NI, and may add their NI savings as an extra contribution.
Does salary sacrifice affect my student loan?
Yes. Student loan repayments are calculated on your post-sacrifice salary, so sacrificing reduces your loan repayments too.
Can my employer force me to salary sacrifice?
No. Salary sacrifice requires your agreement. It must not reduce your salary below the National Minimum Wage.