How salary sacrifice works

Salary sacrifice (also called salary exchange) is an arrangement where you agree to give up part of your gross salary, and your employer pays the equivalent amount directly into a benefit — most commonly a pension, an electric car lease, or a cycle-to-work scheme. Because the sacrifice happens before tax and National Insurance are calculated, you save both — not just income tax.

For a basic rate taxpayer, pension salary sacrifice typically saves 28% of the amount sacrificed (20% income tax + 8% employee NI). For a higher rate taxpayer, the saving is 42% (40% + 2%). This makes it significantly more efficient than making pension contributions from your net pay.

2025/26 Saving Rates

Basic rate (up to £50,270): Save 28% (20% tax + 8% NI)  ·  Higher rate (£50,271–£100k): Save 42% (40% + 2%)  ·  In the £100k trap: Effective saving up to 60% (60p in £1 lost to taper)

The £100,000 personal allowance trap

Once your adjusted net income exceeds £100,000, your personal allowance (normally £12,570) is reduced by £1 for every £2 of income above £100,000. It’s fully withdrawn at £125,140. This creates an effective 60% marginal tax rate on income between £100,000 and £125,140 — 40% income tax plus the equivalent of another 20% from the lost allowance.

Salary sacrifice is one of the most effective ways to escape this trap. If you earn £110,000 and sacrifice £10,000 into a pension, your adjusted net income falls to £100,000, restoring your full personal allowance and generating a 60% effective saving on that £10,000.

Electric car salary sacrifice

Company electric car schemes via salary sacrifice have become one of the most valuable employee benefits in the UK. The key advantage: electric vehicles have a Benefit in Kind (BiK) rate of just 3% in 2025/26 (rising to 4% in 2026/27), compared to 20–37% for petrol/diesel cars. Combined with the salary sacrifice tax and NI savings, the effective monthly cost of leasing an EV through a scheme is often 30–40% cheaper than leasing privately.

Does salary sacrifice affect my mortgage application?
Salary sacrifice reduces your gross salary for tax purposes, but mortgage lenders generally use your total package value — not just the sacrificed-down salary. Most lenders will add back pension contributions and car scheme costs when assessing affordability. Always declare the full picture to your mortgage adviser and lender to avoid complications.
Does salary sacrifice reduce my State Pension entitlement?
State Pension entitlement is based on qualifying National Insurance years, not the amount of NI paid. As long as your post-sacrifice salary remains above the Lower Earnings Limit (£6,396 in 2025/26), you’ll still accrue a qualifying year. The vast majority of salary sacrifice arrangements will not affect State Pension entitlement.
Can I change my salary sacrifice amount during the year?
Generally no — salary sacrifice is a contractual change and most employers only allow amendments at specific life events (marriage, birth of a child, house purchase) or during an annual review window. This is an HMRC requirement: arrangements must be genuine contractual changes, not flexible spending accounts. Plan your sacrifice carefully at the start of each tax year.
Do employer NI savings get added to my pension?
It depends on your employer. When you salary sacrifice, your employer also saves 15% NI on the sacrificed amount. Some employers (particularly in the public sector and larger companies) pass all or part of this saving into your pension on top of their regular contribution — effectively giving you free money. Check your employer’s scheme documentation or ask HR whether they share their NI saving.