Salary sacrifice (sometimes called salary exchange) is an arrangement where you agree to give up part of your gross salary in exchange for a non-cash benefit — typically an employer pension contribution. Because you never receive the salary, you avoid paying income tax and National Insurance on it. Your employer also avoids their National Insurance, and many pass some of that saving on to you.
For most employees, salary sacrifice is one of the most tax-efficient ways to save for retirement. But it is not without trade-offs.
How Salary Sacrifice Works
Under a standard pension arrangement, you contribute from your net (after-tax) pay. Your pension provider claims basic rate relief (20%) from HMRC, and higher/additional rate taxpayers must claim extra relief through Self Assessment.
Under salary sacrifice, your employment contract is amended so your gross salary is reduced by the contribution amount. The employer pays the equivalent directly into your pension. Because you are contributing from pre-tax, pre-NI income, the tax and NI relief are automatic.
The NI Saving: Where the Real Advantage Lies
For a basic rate taxpayer, the income tax relief is the same either way (20%). The difference with salary sacrifice is the National Insurance saving.
In 2025/26:
- Employees pay 8% NI on earnings between £12,570 and £50,270
- Employees pay 2% NI on earnings above £50,270
| Scenario | Annual Contribution | Tax Saved | NI Saved (Employee) | Total Saving |
|---|---|---|---|---|
| Personal contribution (basic rate) | £3,000 | £600 | £0 | £600 |
| Salary sacrifice (basic rate, earnings £30k) | £3,000 | £600 | £240 | £840 |
| Salary sacrifice (higher rate, earnings £60k) | £3,000 | £1,200 | £60 | £1,260 |
The employee NI saving is most significant for basic rate taxpayers earning below £50,270 — they save 8p per £1 sacrificed, which is real money on top of the income tax relief.
Employer NI: The Bonus You Can Negotiate
Employers also pay 15% NI (from April 2025) on salaries above the £5,000 secondary threshold. When you salary sacrifice, your employer saves this on the sacrificed amount too.
A £3,000 salary sacrifice saves your employer £450 in NI. Many employers pass all or part of this back into your pension as an additional contribution. If your employer does not, it is worth asking — especially at negotiation time.
| Employer passes back | Extra pension contribution on £3,000 sacrifice |
|---|---|
| 0% | £0 |
| 50% of NI saving | £225 |
| 100% of NI saving | £450 |
The Trade-Offs You Must Understand
1. Mortgage Affordability
Lenders calculate borrowing capacity based on your contractual salary — the reduced figure after sacrifice. If you are applying for a mortgage or remortgaging, a large salary sacrifice could reduce how much you can borrow.
Example: You earn £50,000 and sacrifice £10,000. Your contractual salary is £40,000. A lender offering 4.5x salary may lend £180,000 rather than £225,000 — a £45,000 difference.
Speak to a mortgage broker before committing to a large sacrifice if you plan to buy or remortgage soon.
2. Statutory Payments
Certain statutory payments — statutory maternity pay, statutory sick pay, statutory adoption pay — are calculated on your average weekly earnings from your contractual salary. A lower contractual salary means lower statutory payments.
However, your employer may choose to calculate contractual maternity pay on your pre-sacrifice salary, so check your employer’s policy.
3. State Pension Qualifying Years
Your State Pension entitlement is based on qualifying National Insurance years, not the amount of NI paid. You need your earnings to be above the Lower Earnings Limit (LEL) of £6,396 in 2025/26 to count as a qualifying year.
For most employees, salary sacrifice will not push earnings below the LEL — but if you earn close to this threshold, be cautious. Similarly, if you are a low earner, sacrificing could affect your entitlement to New Style ESA or JSA, which are contributory benefits.
4. Life Assurance and Death-in-Service
Some employer life assurance and death-in-service policies calculate the benefit as a multiple of your contractual salary. Sacrificing reduces this payout. Check your policy document.
Who Benefits Most From Salary Sacrifice?
| Earner type | Benefit |
|---|---|
| Basic rate taxpayer (£12,571–£50,270) | 20% tax + 8% NI = 28% effective saving |
| Higher rate taxpayer (£50,271–£125,140) | 40% tax + 2% NI = 42% effective saving |
| Near £100k earner | Can reduce adjusted income to restore Personal Allowance — up to 60% effective relief |
| Low earner (near NMW) | Proceed carefully — watch LEL and statutory payments |
Threshold Planning: The £100,000 Case
If your income is between £100,000 and £125,140, salary sacrifice is particularly powerful. Your Personal Allowance is tapered away at a rate that creates an effective 60% income tax rate in this band. Every £1 sacrificed reduces your adjusted net income, potentially restoring your Personal Allowance.
Example: Earn £110,000. Sacrifice £10,000. Adjusted income falls to £100,000, restoring the full £12,570 Personal Allowance. Tax saving: approximately £5,028 in restored allowance plus NI savings.
What to Check With Your Employer
- Does the scheme pass back any employer NI saving?
- Is your contractual salary shown on payslips and mortgage references?
- How does it affect statutory payments or life insurance?
- Can you adjust or stop the sacrifice if circumstances change?
The Bottom Line
For most employed people, salary sacrifice is worth it — the NI savings on top of normal pension tax relief make it more efficient than contributing from net pay. The mortgage and statutory payment considerations are real but manageable for most people. If you earn near £100,000, the ability to restore the Personal Allowance makes it even more compelling.
Use our pension tax relief calculator to model your personal saving across standard contributions versus salary sacrifice.