Salary Sacrifice, Explained

Salary sacrifice is an agreement with your employer to reduce your contractual salary in exchange for a benefit — most often extra pension contributions, but also cycle-to-work schemes, electric car leases and childcare support.

Why it saves money

Because your salary itself is lower, both income tax and National Insurance fall — for you and for your employer. A basic-rate taxpayer sacrificing £100 into a pension gives up about £72 of take-home (after 20% tax and 8% NI) for £100 in the pension. Under a normal net pay pension, the same £100 costs £80 of take-home, because NI is still charged. Employers often share part of their 15% employer NI saving too.

The limits and downsides

Sacrifice cannot take your cash pay below the National Minimum Wage (£12.71 an hour for 21+ in 2026/27). A lower salary can also reduce: mortgage affordability assessments based on salary, employer life cover set as a multiple of salary, and statutory pay calculated from earnings. It also lowers student loan repayments (a side effect many graduates welcome) and can restore your Personal Allowance if you earn just over £100,000 — see the 60% tax trap.

Is it the same as a normal pension contribution?

No. Net pay arrangements deduct pension before tax but after NI; relief-at-source schemes add basic-rate relief to the pension itself. Salary sacrifice is the only one of the three that saves National Insurance. Our pension calculator models the net pay method and explains the difference.