Salary sacrifice is one of the most underused tax-saving opportunities available to UK employees. It lets you get pension contributions, a new bike, or an electric car at an effective discount of 32–47% — legally, with your employer's cooperation. Here's exactly how it works.
How Salary Sacrifice Works
You agree with your employer to reduce your gross (before-tax) salary by a fixed amount. In return, your employer provides a non-cash benefit of equal value — usually additional pension contributions, a cycle-to-work bike, an electric vehicle lease, or childcare vouchers.
Because your gross salary is lower, you pay less income tax and less National Insurance on your earnings. Your employer also pays less employer NI, which is why many employers are willing to offer these schemes — they save money too.
Key insight: If you earn £40,000 and sacrifice £3,000 for pension, your taxable salary drops to £37,000. You save 20% income tax (£600) and 8% employee NI (£240) on that £3,000 — so the benefit costs you just £2,160 in lost take-home pay, not the full £3,000.
The Savings by Tax Band
| Tax Band | Income Tax Saving | NI Saving | Total Discount |
|---|---|---|---|
| Basic rate (£12,571–£50,270) | 20% | 8% | 28% |
| Higher rate (£50,271–£125,140) | 40% | 2% | 42% |
| Additional rate (£125,140+) | 45% | 2% | 47% |
Higher-rate taxpayers benefit most: sacrificing £5,000 saves them £2,100 in tax and NI, meaning the benefit effectively costs them just £2,900.
What You Can Sacrifice For
Pension Contributions
The most common use. Extra pension contributions through salary sacrifice save both tax and NI, whereas personal pension contributions only attract tax relief (you still pay NI on the earnings). This makes salary sacrifice more efficient for pension saving than making contributions from your net pay.
Cycle to Work
Get a bike and accessories worth up to £1,000 (or more, depending on your employer's scheme) and spread the cost over 12 months from gross salary. The effective saving means a £1,000 bike costs a basic-rate taxpayer about £680 in reduced take-home pay.
Electric Vehicle (EV) Lease
One of the most valuable salary sacrifice schemes available. A fully electric vehicle through salary sacrifice attracts a Benefit in Kind rate of just 2% in 2025/26, making it by far the cheapest way to lease an EV. Many employees save 40–60% compared to a personal lease.
Childcare and Other Benefits
While the childcare voucher scheme closed to new entrants in October 2018, existing members can still use it. Some employers also offer salary sacrifice for technology purchases, gym memberships, or car parking.
What to Watch Out For
Mortgage applications. Lenders look at your gross salary, which is lower after sacrifice. Some lenders add back pension sacrifice contributions, but not all. Check with your mortgage broker before committing to large sacrifice amounts if you're planning to buy a property.
Minimum wage floor. Your cash salary after sacrifice can't fall below the National Minimum Wage (£12.21/hour for 2025/26 for workers aged 21+). This caps how much you can sacrifice.
State pension impact. Only relevant if your salary drops below the NI Lower Earnings Limit (£6,396 for 2025/26), which would affect your qualifying year for state pension. For most earners, this isn't a concern.
Maternity/paternity pay. Statutory maternity pay is based on your average earnings in the qualifying period. If you're sacrificing a significant amount, your SMP could be lower. Worth considering if you're planning a family.
Salary Sacrifice vs Personal Pension Contributions
This is one of the most commonly misunderstood areas of pension saving. Both routes get you tax relief, but salary sacrifice also saves National Insurance — making it the clear winner in most cases.
Here's a direct comparison for a higher-rate taxpayer contributing £5,000 per year to their pension:
| Factor | Personal Contribution | Salary Sacrifice |
|---|---|---|
| Gross contribution | £5,000 | £5,000 |
| Net cost (reduction in take-home) | £3,000 | £2,900 |
| Income tax relief | £2,000 | £2,000 |
| Employee NI saving | £0 | £100 |
| Employer NI saving (to employer) | £0 | £750 |
With personal contributions, you pay from net pay and reclaim tax relief via your pension provider (basic rate) and Self Assessment (higher/additional rate). With salary sacrifice, the tax and NI savings happen automatically through your payslip — no claims needed.
The employer NI saving (£750 in this example) is a bonus. Some employers pass this on as an extra pension contribution, effectively giving you free money. Others keep it. Ask your HR department which approach your employer takes — it can be a significant differentiator.
Student Loan Repayments and Salary Sacrifice
Here's a benefit that's often overlooked: salary sacrifice also reduces your student loan repayments, because repayments are calculated on your post-sacrifice salary.
For a Plan 2 loan (the most common for English graduates since 2012), you repay 9% of everything you earn above £27,295. If your salary is £35,000 and you sacrifice £3,000 for pension, your student loan repayment drops from £694 to £424 per year — a saving of £270. Combined with the tax and NI savings, the total benefit of that £3,000 sacrifice is substantial.
This interaction makes salary sacrifice particularly attractive for graduates in their 20s and 30s who are simultaneously repaying student loans and building pension savings. The effective discount on the sacrificed amount can exceed 40% when you combine income tax, NI, and student loan savings.
EV Salary Sacrifice: The Best Deal in 2025/26
Electric vehicle salary sacrifice deserves special attention because the savings are extraordinary. A fully electric vehicle attracts a Benefit in Kind rate of just 2% in 2025/26, making it by far the cheapest way to lease an EV.
Consider a car with a P11D value of £42,000 on a 3-year salary sacrifice lease costing £550/month in gross sacrifice. The annual BIK is just £840 — or £336 in tax for a higher-rate taxpayer. Compare this to a personal lease at £500/month from net pay (£6,000/year from after-tax income). The salary sacrifice route costs approximately £4,296 in total when you account for the tax, NI savings, and BIK tax. That's roughly £1,700 per year cheaper for an equivalent vehicle.
The catch: if you leave your employer before the lease ends, you may need to take over the personal lease at the full rate. Read the small print carefully, and consider your job stability before committing to a long lease term.
Calculate Your Salary Sacrifice Savings
See the exact tax and NI saving for your salary and sacrifice amount.
Salary Sacrifice Calculator →How to Set Up Salary Sacrifice
Salary sacrifice is arranged between you and your employer — you can't set it up unilaterally. Start by asking your HR department or payroll team what salary sacrifice schemes they offer. Many employers have pre-existing arrangements with pension providers, cycle-to-work scheme administrators (like Cyclescheme or Bike2Work), and EV lease providers (like Octopus Electric Vehicles or LeasePlan).
If your employer doesn't currently offer salary sacrifice, it's worth raising the idea. The employer NI savings give them a financial incentive to set it up, and the administrative burden is minimal once the payroll process is configured. For pension sacrifice specifically, most workplace pension providers can enable it with a simple change to the employer's contribution setup.
Once agreed, the sacrifice is formalised through a variation to your employment contract. This is important — HMRC requires a genuine contractual change, not just an informal arrangement. The reduced salary must be reflected on your payslip, and the sacrifice typically runs for a fixed period (often 12 months for cycle-to-work, 3–4 years for EV leases) with limited ability to opt out mid-term.
Salary Sacrifice and Pension Lifetime Allowance
The lifetime allowance for pensions was abolished from 6 April 2024, removing a significant barrier that previously discouraged high earners from maximising pension contributions. However, the annual allowance still applies: you can contribute up to £60,000 per year (including employer contributions) to your pension, with the allowance tapering for those earning above £260,000 adjusted income.
Salary sacrifice contributions count toward this annual allowance. If you're already receiving substantial employer contributions and making personal contributions, check that adding salary sacrifice doesn't push you over the limit. Exceeding the annual allowance creates a tax charge that claws back the relief — defeating the purpose of the sacrifice.
Should You Do It?
For pension contributions, salary sacrifice is almost always worth it — you save NI on top of the tax relief you'd get anyway, and your employer saves too (some pass their NI saving on as an extra employer contribution, making it even better).
For cycle to work and EV leases, the maths is compelling if you actually need the bike or car. Don't sacrifice salary for something you wouldn't otherwise buy just because the discount looks attractive.
Use our Salary Sacrifice calculator to see the exact impact on your take-home pay, and our Pension calculator to see what extra contributions could mean for your retirement pot.