What is salary sacrifice?
Salary sacrifice is an agreement to give up part of your contractual pay in return for a non-cash benefit, usually employer pension contributions, saving tax and National Insurance.
What salary sacrifice means
With salary sacrifice, an employee agrees to a lower cash salary and the employer provides a benefit worth the same amount instead. Because the employee is no longer paid that money, there is no income tax or employee National Insurance on it, and the employer saves its 15% National Insurance too.
It works best for benefits that are tax-free in their own right. The common ones are:
- employer pension contributions, by far the most popular
- electric company cars, which have a low benefit-in-kind rate
- cycle to work schemes
- workplace nursery places
The change has to be agreed before the pay is earned and written into the contract. You cannot sacrifice pay you are already entitled to.
Example
An employee on £45,000 sacrifices £3,000 into their pension.
| Without sacrifice | With sacrifice | |
|---|---|---|
| Cash salary | £45,000 | £42,000 |
| Income tax and NI saved by employee | £0 | £840 (28% of £3,000) |
| Employer NI saved | £0 | £450 (15% of £3,000) |
The employee's take-home falls by about £2,160, not £3,000, and £3,000 goes into the pension. Some employers add part or all of their £450 saving to the pension too.
Why it matters for your business
For employers it is a cheap way to improve benefits: the National Insurance saving partly funds it. For higher earners it can keep income below the £100,000 point where the personal allowance starts to be withdrawn, or below the level at which the High Income Child Benefit Charge applies.
Pay after sacrifice must not drop below the National Minimum Wage. It can also reduce things linked to salary, such as statutory maternity pay, mortgage borrowing capacity and life cover based on salary, so employees should understand the effect before signing.
Changes announced for pensions
The government has announced a cap on the National Insurance relief for pension salary sacrifice from April 2029. Check the current rules before setting up a large arrangement.
Setting up a scheme
The employer needs a written agreement varying each employee's contract, a pension provider that accepts the arrangement and payroll set up to deduct the sacrificed amount before tax and National Insurance. Employees normally commit for a year at a time, with changes allowed for life events such as a new baby or a house purchase.
Common questions
For pension contributions it usually is, because both you and your employer avoid National Insurance on the sacrificed amount. It is less attractive if it would take your pay near the minimum wage or reduce benefits you rely on.
Directors of their own company usually do not need it. The company can make employer pension contributions directly, which are deductible for Corporation Tax and carry no NI, with the same effect and less paperwork.