How it works
You and your employer agree to change your contract: your salary goes down, and your employer spends the money on something for you instead. The change has to be genuine, so your contract and payslips show the lower salary (GOV.UK, salary sacrifice and the effects on PAYE).
Because your cash pay is lower, you pay less:
- income tax, at 20%, 40% or 45% (or the Scottish rates)
- employee National Insurance, at 8% on pay between £12,570 and £50,270 and 2% above
- student loan repayments, if you have them, at 9% or 6% above the threshold
Your employer saves 15% employer National Insurance on the pay it no longer pays you. Some employers add that saving to your pension.
Pensions
Pension contributions are the most common use. On a £40,000 salary, sacrificing 5% puts £2,000 into your pension but cuts your take-home pay by only £1,440 a year in 2026/27: you save £400 of income tax and £160 of National Insurance. Your employer saves £300.
Above £100,000 it can be worth more. The personal allowance is cut by £1 for every £2 of income over £100,000. A sacrifice that brings your pay back to £100,000 restores the allowance: on a £105,000 salary, putting £5,000 into your pension costs you £1,900 of take-home pay.
From 6 April 2029, pension sacrifice above £2,000 a year will pay National Insurance. Income tax relief stays. See the April 2029 cap.
Cars and bikes
An electric or plug-in hybrid car through salary sacrifice is taxed as a company car. You pay income tax on the car benefit, which is a percentage of the list price, but no National Insurance on it; your employer pays 15% Class 1A on it. For an electric car the percentage is 4% in 2026/27. See electric car benefit-in-kind rates.
Cars over 75g/km rarely make sense. For them, and for most other benefits, the taxable value is the higher of the salary you give up and the normal benefit value, so most of the saving disappears. Pensions, cycle to work bikes and cars up to 75g/km aren’t caught by this rule.
Bikes under the cycle to work scheme carry no benefit in kind. A £1,200 bike over 12 months costs a basic rate taxpayer £864, 28% off. At the end of the hire you can usually buy it for its fair market value.
The limits
- Minimum wage. A sacrifice can’t take your cash pay below the national minimum wage for your hours. From April 2026 that’s £12.71 an hour at 21 and over: £24,784.50 a year for 37.5 hours a week.
- State pension. If your pay falls below £6,708 a year, the lower earnings limit, the job no longer earns you a qualifying year.
- Annual allowance. Pension saving above £60,000 a year, including what your employer pays in, is taxed.
What else to check
A lower salary can also lower things that are worked out from it: statutory maternity or sick pay, some life cover, and what a mortgage lender will lend you. On the other side, it can reduce the High Income Child Benefit charge, which is worked out on your income after the sacrifice. Ask your employer how its scheme treats each of these before you sign up.