What is salary sacrifice?

Salary sacrifice is an agreement between an employee and employer to reduce contractual gross pay in exchange for a non-cash benefit — commonly pension contributions, a bike via the Cycle to Work scheme, or an electric vehicle lease. Because income tax and National Insurance are calculated on the reduced gross pay, both can fall, making the benefit cheaper than paying for it from net take-home pay.

Does salary sacrifice reduce National Insurance as well as income tax?

Yes — salary sacrifice reduces your gross taxable pay before both income tax and employee Class 1 National Insurance are calculated. For earnings in the basic rate band (£12,570–£50,270 in 2025–26), the NI saving is 8% of the sacrificed amount. For earnings above the upper earnings limit (£50,270), the NI saving is only 2%.

Can salary sacrifice push me into a lower tax band?

Yes. If your salary is above a threshold (such as £50,270 where the higher income tax rate starts, or £100,000 where the personal allowance taper begins), a large enough salary sacrifice contribution could bring your taxable income below that threshold, saving tax at the higher marginal rate on the amount above it.

Salary Sacrifice in the UK | Pension, Cycle to Work, EV

Q: How much does salary sacrifice save in tax?

The saving depends on your marginal tax rate. A basic rate taxpayer (e.g. £35,000 salary) saves 20% income tax plus 8% NI on the sacrificed amount — a 28% total saving. For a £1,750 annual pension contribution (5% of salary), that is approximately £490 saved (£350 IT + £140 NI). A higher rate taxpayer saves 40% IT + 2% NI = 42%, so a £3,000 contribution saves approximately £1,260.

Tax guide

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Not financial or tax advice. Employer schemes have rules and limits. Check with your payroll team, HMRC guidance, or a qualified accountant before you rely on any arrangement.

What salary sacrifice means

Under a typical salary sacrifice arrangement, you agree with your employer that your contractual gross pay is reduced in exchange for a non-cash benefit—often pension contributions, a bike, or a leased car. Because income tax and employee National Insurance are usually calculated on the lower cash pay, you can save tax and NI compared with paying from net income, depending on the benefit and how it is taxed.

Pension contributions

Pension salary sacrifice is widely used. The sacrificed amount goes to your pension before PAYE, so both income tax and Class 1 employee NI can fall. The effect on take-home pay is not always intuitive: your net pay drops by less than the gross sacrifice because of the tax and NI you would have paid on that slice of salary.

Cycle to Work

The Cycle to Work scheme commonly uses sacrifice so the bike cost is taken from gross pay within scheme limits. Our calculator includes optional fields for a bike value so you can see illustrative savings alongside other inputs.

Electric vehicle salary sacrifice

EV leasing via salary sacrifice can offer favourable benefit-in-kind treatment compared with many petrol or diesel cars, and you avoid fuel duty on electricity in the same way as other drivers avoid it on home charging. Rules and rates change; the calculator uses simplified assumptions for education only.

Interaction with other taxes

Lowering gross taxable pay can change your position for income tax bands and sometimes other thresholds. It also changes the base we use when we model spending and VAT in the wider effective tax rate view. Use the tool as a sandbox, not a substitute for professional advice.

Worked examples — pension salary sacrifice (2025–26)

The examples below use 2025–26 HMRC rates for England, Wales and Northern Ireland. They assume the pension contribution is made as salary sacrifice (reducing contractual gross pay), not as a personal pension contribution.

Basic rate taxpayer: £35,000 salary, 5% pension sacrifice

Sacrificed amount: £1,750/year. Gross taxable pay falls from £35,000 to £33,250.

Salary sacrifice saving — £35,000 salary, 5% pension (£1,750/year)
	Without sacrifice	With sacrifice	Saving
Gross taxable pay	£35,000	£33,250
Income tax	£4,486	£4,136	£350
Employee NI	£1,794	£1,654	£140
Take-home pay	£28,720	£27,460
Pension contribution	£0	£1,750
Total tax saving			£490

Net cost: take-home falls by £1,260, but £1,750 goes into the pension — a 28% immediate saving on the contribution (20% IT + 8% NI).

Higher rate taxpayer: £60,000 salary, 5% pension sacrifice

Sacrificed amount: £3,000/year. Gross taxable pay falls from £60,000 to £57,000. All sacrificed earnings are in the higher rate band (40% IT + 2% NI).

Salary sacrifice saving — £60,000 salary, 5% pension (£3,000/year)
	Without sacrifice	With sacrifice	Saving
Gross taxable pay	£60,000	£57,000
Income tax	£11,432	£10,232	£1,200
Employee NI	£3,211	£3,151	£60
Take-home pay	£45,357	£43,617
Pension contribution	£0	£3,000
Total tax saving			£1,260

Net cost: take-home falls by £1,740, but £3,000 goes into the pension — a 42% saving (40% IT + 2% NI). NI saving is small because earnings above £50,270 attract only 2% NI.

Common questions

How much does salary sacrifice save in tax?

The saving equals your marginal combined rate on the sacrificed amount. For a basic rate taxpayer (28% combined: 20% IT + 8% NI), a £1,000 sacrifice saves £280. For a higher rate taxpayer with earnings above £50,270 (42% combined: 40% IT + 2% NI), a £1,000 sacrifice saves £420. If sacrifice brings income below £100,000, the saving on the allowance-taper portion can reach 62%.

Does salary sacrifice affect my State Pension?

Salary sacrifice that reduces earnings below the lower earnings limit (£6,396 in 2025–26) can reduce State Pension entitlement. Most full-time employees earning above this threshold are unaffected, but it is worth checking with your employer or a financial adviser if contributions are very large.