Salary sacrifice can be a useful way for employees to reduce tax and National Insurance, increase pension savings and access certain benefits at a lower net cost.
For employers, it can also be a valuable part of a wider benefits package, helping to support recruitment, retention and employee wellbeing.
Used well salary sacrifice can be very effective.
What is salary sacrifice?
Salary sacrifice is a contractual arrangement between an employee and their employer.
The employee agrees to give up part of their gross salary in return for a non-cash benefit.
Common examples include:
- Pension contributions
- Electric cars
- Cycle-to-work schemes
- Workplace nursery places
- Employer-funded pensions advice
- Additional annual leave depending on how the scheme is structured
Because the employee’s cash pay is reduced, the employment contract must be changed. The employer then provides the agreed benefit instead.
The tax treatment depends on the type of benefit being provided.
Where do the savings come from?
For pension salary sacrifice, the sacrificed amount is usually paid into the employee’s pension as an employer contribution.
This can reduce Income Tax and National Insurance for the employee. The employer may also save employer National Insurance.
As a guide the saving can be around:
- 28% for a basic-rate taxpayer sacrificing salary within the main National Insurance band
- 42% for a higher-rate taxpayer sacrificing salary above the Upper Earnings Limit
- 47% for an additional-rate taxpayer
For employees earning between £100,000 and £125,140 the saving can be even more valuable because salary sacrifice may help restore some or all of the personal allowance.
This is the band where the effective tax rate can be particularly high, because the personal allowance is gradually withdrawn once adjusted net income exceeds £100,000.
Not all benefits work in the same way
Salary sacrifice is not as simple as giving up salary and automatically saving tax.
Many arrangements are caught by the Optional Remuneration Arrangement rules. Where this applies the tax charge is usually based on the higher of the salary given up or the taxable value of the benefit. In practice this can remove much of the expected tax saving.
However, some benefits can still work efficiently which include:
- Employer pension contributions
- Cycle-to-work schemes
- Electric and ultra-low emission cars
- Workplace nursery places
- Employer-provided pensions advice subject to limits
For benefits such as gym memberships, gadgets or white goods the tax advantage is often much more limited. This is why it is important to check the rules before putting a scheme in place or agreeing to an arrangement.
Pension salary sacrifice remains the main opportunity
Pensions remain one of the most common and effective uses of salary sacrifice.
For example, a higher-rate taxpayer earning £60,000 who sacrifices £5,000 into their pension usually would save Income Tax and National Insurance on that slice of pay.
The full £5,000 goes into the pension, while take-home pay falls by less than £5,000 because of the tax and National Insurance saving.
If the employer shares some of their employer National Insurance saving the pension contribution could be even higher.
The exact saving depends on the employee’s income, tax code, pension scheme, contribution level and where the sacrificed salary falls.
The April 2029 pension change
There is an important change coming from 6 April 2029.
From that date, only the first £2,000 of pension salary sacrifice each year will be exempt from National Insurance. Salary sacrificed above that amount will be subject to employee and employer National Insurance.
This does not mean pension salary sacrifice is ending. It means:
- Salary sacrifice pension arrangements can continue
- The first £2,000 per employee will still be free from National Insurance
- Amounts above £2,000 will attract employee and employer National Insurance
- Income tax relief on pension contributions will continue, subject to the usual pension limits
- Employers will need to prepare for payroll changes before the rules start
For 2026/27, 2027/28 and 2028/29 the current National Insurance treatment remains in place.
That gives employees and employers a planning window where larger pension contributions are being considered.
Salary sacrifice and key income thresholds
Salary sacrifice can also help manage adjusted net income.
This can be particularly useful where income sits close to certain thresholds.
The £100,000 personal allowance taper
The personal allowance is reduced by £1 for every £2 of adjusted net income above £100,000.
It is lost completely once adjusted net income reaches £125,140.
For employees in this band, pension salary sacrifice can reduce adjusted net income and potentially restore some or all of the personal allowance.
This can make the effective tax saving particularly valuable.
The High Income Child Benefit Charge
The High Income Child Benefit Charge applies where adjusted net income exceeds £60,000.
The charge gradually increases between £60,000 and £80,000. Once income reaches £80,000, the charge is equal to 100% of the Child Benefit received.
Salary sacrifice that reduces adjusted net income below £60,000 can reduce or remove the charge.
This can be a useful planning point for employees with children who are close to the threshold.
The higher-rate and additional-rate thresholds
For employees just above the higher-rate threshold, salary sacrifice may reduce the amount of income taxed at 40%.
For employees close to the additional-rate threshold, it may help keep income below the point at which 45% tax applies.
The best outcome depends on the employee’s overall earnings, pension position and personal circumstances.
Electric car salary sacrifice
Electric car salary sacrifice remains attractive for many employees who are already considering a new car.
The lease cost is taken from gross pay and fully electric cars continue to benefit from relatively low benefit-in-kind rates.
For a zero-emission car, the benefit-in-kind percentage is 4% in 2026/27. It is due to rise to 5% in 2027/28, 7% in 2028/29 and 9% in 2029/30.
The tax advantage will reduce as these rates increase but electric car salary sacrifice can still be worth reviewing. The saving will depend on the car, lease terms, insurance, maintenance package, tax rate and whether the employer passes on any of their National Insurance saving.
Before signing up, employees should compare the net salary sacrifice cost with a personal lease.
The limits and trade-offs
Salary sacrifice is not always the right option. There are a few important points to consider before entering or increasing an arrangement.
Statutory pay
Statutory maternity pay, paternity pay, adoption pay and sick pay are usually based on earnings after salary sacrifice. This means heavy salary sacrifice in the relevant calculation period could reduce statutory entitlements.
This is particularly important for employees planning parental leave or where sick pay may be relevant.
Mortgage applications
Salary sacrifice can affect mortgage affordability checks. Some lenders look at post-sacrifice pay. Others may take the arrangement into account if it is clearly shown on payslips or can be changed.
Anyone planning to buy, move house or remortgage should check this before entering or changing a salary sacrifice arrangement.
Minimum wage rules
Salary sacrifice must not reduce cash pay below the National Minimum Wage or National Living Wage Employers need to check this before processing any salary reduction.
State Pension entitlement
To build a qualifying year for the State Pension through earnings, post-sacrifice pay still needs to be at or above the National Insurance Lower Earnings Limit.
Most full-time employees will remain above this level, but care is needed for part-time workers or employees making larger sacrifices.
Pension annual allowance
Salary sacrifice pension contributions count towards the pension annual allowance. For 2026/27, the standard annual allowance is £60,000 although this can be reduced for higher earners.
Employees already making significant pension contributions should check their allowance before increasing salary sacrifice.
Practical questions to ask
Before setting up or changing a salary sacrifice arrangement, it is worth asking:
- What tax band am I in?
- Am I close to the £60,000, £100,000 or £125,140 thresholds?
- Am I claiming Child Benefit?
- Does my employer pass on any employer National Insurance saving?
- How often can I change the arrangement?
- Could this affect statutory pay or a mortgage application?
- Am I already contributing close to my pension annual allowance?
- Am I sacrificing more than £2,000 into my pension ahead of the April 2029 change?
For employers, the key questions are around scheme design, payroll processing, employee communication and compliance. The arrangement needs to be properly documented, the employment contract must be updated, and payroll must be set up correctly.
Final thoughts
Salary sacrifice remains a useful planning option in 2026/27.
It can be particularly effective for pension contributions, electric cars and employees close to key income thresholds such as £60,000 or £100,000.
However, it is not something to enter into without checking the wider impact.
The April 2029 pension change will reduce some of the National Insurance benefit for higher pension salary sacrifice contributions, but it does not remove salary sacrifice altogether. The next three tax years still offer a valuable planning window under the current rules.
If you are an employer looking to introduce or review a salary sacrifice scheme, or an employee wanting to understand whether it could work for you, please get in touch with the team at SeavorChartered.
