Salary sacrifice explained
Salary sacrifice means giving up part of your salary in exchange for an employer benefit, usually a pension contribution. Because your pay is lower, you pay less Income Tax and National Insurance. For a basic-rate taxpayer, each £100 into the pension costs about £72 of take-home pay.
A 5% pension on £40,000.
Your contract salary goes from £40,000 to £38,000 and your employer pays the £2,000 into your pension. You pay no Income Tax (20%) or National Insurance (8%) on that £2,000, so your take-home pay drops by only £1,440.
Salary sacrifice vs a normal workplace pension.
Monthly cost to your take-home pay of a 5% pension contribution in 2026/27:
| Salary | 5% contribution a year | Cost a month (net pay pension) | Cost a month (salary sacrifice) | Cost per £100 (sacrifice) |
|---|---|---|---|---|
| £25,000 | £1,250 | £83 | £75 | £72 |
| £30,000 | £1,500 | £100 | £90 | £72 |
| £40,000 | £2,000 | £133 | £120 | £72 |
| £60,000 | £3,000 | £150 | £145 | £58 |
| £100,000 | £5,000 | £250 | £242 | £58 |
A net pay pension already saves Income Tax. Salary sacrifice adds the National Insurance saving on top: 8% for most earners, 2% on pay above £50,270. Some employers also pass on part of their own 15% National Insurance saving, which makes it even better.
Where salary sacrifice is most powerful.
Bringing income below £100,000 can also keep access to Tax-Free Childcare and 30 hours of funded childcare, which are lost if either parent's adjusted net income is over £100,000.
Things to check.
- Minimum wage: sacrifice cannot take your pay below the National Minimum Wage.
- Mortgages: some lenders use the lower, post-sacrifice salary when working out how much you can borrow.
- Linked benefits: life cover, pay rises, overtime rates and some statutory payments can be based on the lower salary. Ask your employer which salary they use.
- Student loans: repayments are worked out on the lower pay, so you repay a little less each month.
- Coming change: from 6 April 2029, only the first £2,000 a year of pension salary sacrifice will be free of National Insurance. Income Tax relief is not affected.
Other common schemes include Cycle to Work and electric car schemes. Childcare vouchers closed to new joiners in 2018.
Choose “salary sacrifice” in the take-home pay calculator to compare pension methods on your salary.
Salary sacrifice FAQs
Is salary sacrifice worth it?
For pension saving it is usually the cheapest way to contribute, because you save National Insurance as well as tax. The main downsides are the lower contractual salary and its knock-on effects listed above.
Can I change my mind?
Usually only once a year or after a ‘lifestyle event’ such as a new baby or a change of job. Check your employer's scheme rules.
Does salary sacrifice affect my State Pension?
Not as long as your pay stays above the Lower Earnings Limit, which it will for most full-time employees.
GOV.UK salary sacrifice for employers · GOV.UK: salary sacrifice changes from April 2029. Figures are worked examples for planning, not financial advice.