How salary sacrifice works, with real numbers
Published 2026-08-29, checked against current rates 2026-08-28.
Salary sacrifice works by making your gross salary smaller. You agree with your employer to give up part of your contractual pay, and in exchange they put that money somewhere else, usually a pension, sometimes an electric car or a bike. Because the money never counts as salary, it is never taxed as salary: it escapes income tax and National Insurance, which is what separates sacrifice from every other way of paying into a pension. On the 2026/27 rates (checked 2026-08-28), a basic-rate employee on £30,000 who sacrifices 5% of pay puts £1,500 a year into their pension and sees take-home fall by only £1,080. That is £72 of real money for every £100 in the pot. The higher your marginal rate, the cheaper it gets.
For your own salary and contribution rate rather than the examples below, the calculator compares your pay with and without sacrifice, and shows the National Insurance your employer saves too.
Open the salary sacrifice calculatorWhat is salary sacrifice?
Salary sacrifice is a formal change to your employment contract. You give up a fixed amount or percentage of gross pay, and your employer redirects it into a benefit, most often a workplace pension. Your P60 and payslip then show the reduced figure as your gross pay, because legally that is now your salary. HMRC treats the sacrificed amount as employer money rather than yours, so it never enters the income tax or National Insurance calculation at all. This is the whole trick, and it is why the saving is larger than ordinary pension tax relief: relief refunds the income tax you paid, but sacrifice means the National Insurance was never charged either. The arrangement has to be agreed in advance and cannot be applied retrospectively to pay you have already earned.
How much does £100 in your pension actually cost?
The answer depends on your marginal rate. Each row below sacrifices 5% of salary. The cost column is what your take-home pay actually falls by for every £100 that lands in the pension.
| Salary | Into the pension | Take-home falls by | Cost per £100 | Employer NI saved |
|---|---|---|---|---|
| £30,000 | £1,500 | £1,080 | £72 | £225 |
| £45,000 | £2,250 | £1,620 | £72 | £338 |
| £70,000 | £3,500 | £2,030 | £58 | £525 |
| £110,000 | £5,500 | £2,090 | £38 | £825 |
The £110,000 row is the one worth staring at. Inside the £100,000 personal allowance taper, every pound sacrificed also restores fifty pence of tax-free allowance, so the effective saving passes 60% before National Insurance is counted. Sacrificing enough to get back under £100,000 is worth more than any other use of this arrangement.
Is salary sacrifice better than a normal pension contribution?
Yes, and here is the like-for-like proof. All three rows below put the same £2,250 into a pension from a £45,000 salary. Only the mechanism differs.
| Arrangement | Income tax | National Insurance | Take-home |
|---|---|---|---|
| Salary sacrifice | £6,036 | £2,414 | £34,300 |
| Net pay arrangement | £6,036 | £2,594 | £34,120 |
| Relief at source | £6,486 | £2,594 | £33,670 |
| No pension | £6,486 | £2,594 | £35,920 |
Sacrifice and net pay both cut the income tax bill by the same amount. The difference is the National Insurance line: £2,414.40 against £2,594.40, a saving of £180.00 a year for contributing exactly the same money. Relief at source looks worst here because the basic-rate top-up arrives inside the pension rather than in your pay, and a higher-rate taxpayer has to claim the rest back from HMRC separately. Many people never do.
What does salary sacrifice affect?
A smaller official salary is not free of consequences.
- Mortgage applications. Lenders assess your gross salary, and after sacrifice that number is genuinely lower. Most will consider the pre-sacrifice figure if you ask and your employer confirms it, but you have to raise it.
- Statutory pay. Maternity, paternity and sick pay are worked out from post-sacrifice earnings. Pausing sacrifice before a period of maternity leave is a common and sensible move.
- The minimum wage floor. Sacrifice cannot take your pay below the National Minimum Wage. Employers must refuse a sacrifice that would breach it.
- Anything keyed to income. A lower salary can help you, by keeping you under the Child Benefit charge threshold or the £100,000 cliff for tax-free childcare. That is often worth more than the tax saving itself.
What can be sacrificed?
Pensions are the main use. Electric cars are the fast-growing one, because an EV through a sacrifice scheme carries a benefit-in-kind charge of just 4% of list price, so the tax you pay on the benefit is far smaller than the tax you avoid on the salary. Cycle-to-work schemes and additional annual leave are common. Childcare vouchers were closed to new joiners in October 2018 and are being replaced by tax-free childcare. Employers are under no obligation to offer any of it, and small employers frequently do not.
When is salary sacrifice the wrong move?
When your pay is near the minimum wage, when you are about to apply for a mortgage or start statutory leave, or when you will need the money before pension access age, currently 55 and rising to 57 in 2028. Locking cash into a pension is only a saving if you can genuinely do without it for decades. The government has also announced a £2,000 annual cap on the National Insurance advantage for pension sacrifice from April 2029, so the arrangement gets less generous for larger contributions from that point. The income tax saving is unaffected.
Sources
- HMRC: rates and thresholds for employers 2026 to 2027
- gov.uk: salary sacrifice for employers
- gov.uk: company car benefit, the appropriate percentage
Every figure on this page is computed from those tables at build time, checked 2026-08-28. If a number here ever disagrees with gov.uk, gov.uk is right and this is a bug worth telling us about. See our corrections policy.
Related guides
How to read your payslip, line by line
Gross, taxable pay, NI letter, YTD columns. What each one means and the four checks that catch a payroll error early.
The personal allowance explained for 2026/27
The tax-free slice, what it saves you in cash, and the three situations where yours is smaller than the headline figure.
All 10 guides are listed on the guides index, and every calculator on the home page.