How salary sacrifice cuts your tax
Last reviewed 08/09/26
Last Gov update 06/04/26
Salary sacrifice is a deal with your employer. You give up part of your salary, and they put it towards a benefit instead, usually a pension. The pay you give up is never taxed, and no National Insurance is taken from it. So the benefit costs you less than paying for it out of your take-home.
What salary sacrifice is
You agree to a lower salary, and in return your employer pays for something on your behalf. The classic example is a pension. You give up £5,000 of salary, and your employer pays that £5,000 into your pension. The money never lands in your pay, so it is not taxed and no National Insurance is due on it. Your gross salary drops, and your tax and National Insurance drop with it.
Why it beats a normal pension contribution
A normal workplace pension already saves you Income Tax. Salary sacrifice saves that same Income Tax, and it saves National Insurance too. You give the pay up before National Insurance is worked out, rather than spending it after National Insurance has been taken. That extra saving is money the other ways of paying into a pension do not give you, as the worked example above shows.
Read how pension tax relief works in fullThe schemes it covers
A pension is the most common, but salary sacrifice covers other benefits too. An electric car through a workplace scheme is the strongest of them, because an electric company car is taxed very lightly. Cycle-to-work bikes and extra holiday work the same way. Each one is paid for out of gross salary, so each saves you tax and National Insurance.
The limit: your pay cannot go below the minimum wage
There is a floor. A salary sacrifice cannot take your cash pay below the National Minimum Wage. Your employer has to cap the amount you sacrifice, so your remaining pay stays above that line. That is why a large sacrifice on a lower salary may be refused.
A lower official salary can matter elsewhere too. A mortgage lender looks at your reduced salary, not the pay before the sacrifice, and some earnings-linked benefits use it too.
A change coming to sacrificed pensions
One change is on the way. From April 2029, only the first £2,000 you sacrifice into a pension each year will be free of National Insurance. Above that £2,000, National Insurance will apply to the pay you sacrifice. Most basic-rate savers sacrifice less than this, so it is aimed at larger contributions.
See what it saves you
Open the pension options in the calculator and choose salary sacrifice. It shows the tax and National Insurance you save, and how the same contribution costs you less this way than through a normal pension.
Common questions
How does salary sacrifice work?
You agree to give up part of your salary, and your employer puts it towards a benefit instead, most often a pension. The pay you give up never reaches you, so it is not taxed and no National Insurance is due on it. Your gross salary drops, and with it your tax and National Insurance.
Is salary sacrifice worth it?
For most people, yes. It saves the same Income Tax as a normal pension contribution. It saves National Insurance on top, which the other methods do not. The catch is that it lowers your official salary, which can matter for a mortgage or some earnings-linked benefits. The calculator shows the saving for your pay.
Does salary sacrifice reduce your National Insurance?
Yes, and that is the point. You give up gross pay before National Insurance is worked out, so you pay less of it. A normal workplace pension saves you Income Tax but not National Insurance. On the same contribution, salary sacrifice is the only method that saves both.