Salary sacrifice is one of the most powerful — and most underused — tax tools available to UK employees. Yet most people have no idea how much they could save.
This guide explains exactly how it works, with real numbers.
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Enter your salary and pension % to get your personal breakdown.
What is salary sacrifice?
Salary sacrifice is an agreement between you and your employer to reduce your gross salary in exchange for a non-cash benefit — most commonly pension contributions.
Instead of earning £45,000 and paying pension contributions from your net pay, you agree to earn £42,000 and have £3,000 paid directly into your pension by your employer.
The result? You pay tax and National Insurance on £42,000 instead of £45,000.
Salary sacrifice is not the same as a pay cut. Your total compensation stays the same — you just receive part of it as pension contributions instead of cash.
How much can you actually save?
Here's a real example for someone earning £45,000 sacrificing an extra £200/month (£2,400/year):
So instead of costing you £2,400, the contribution only costs £1,728 — because the government effectively subsidises £672 of it.
Why salary sacrifice beats paying into a pension normally
There are two ways to contribute to a pension:
- Salary sacrifice — reduces gross pay before tax and NI
- Relief at source (AVC) — you pay from net pay, HMRC adds 20% back
Salary sacrifice saves both income tax AND National Insurance. Relief at source only saves income tax. For most employees, salary sacrifice is more efficient.
The employer NI bonus
Here's something most employees don't know: your employer also saves NI when you sacrifice salary.
Employers pay 13.8% NI on your earnings. When you sacrifice £2,400, your employer saves:
£2,400 × 13.8% = £331
Many employers pass this saving back into your pension. It's worth asking your HR team.
Who benefits most from salary sacrifice?
Higher earners benefit most — especially those earning between £100,000 and £125,140 where the effective marginal tax rate is 60% due to the Personal Allowance taper.
| Income band | Marginal tax rate | NI rate | Combined saving per £100 sacrificed |
|---|---|---|---|
| Under £12,570 | 0% | 0% | £0 |
| £12,571–£50,270 | 20% | 8% | £28 |
| £50,271–£100,000 | 40% | 2% | £42 |
| £100,001–£125,140 | 60% | 2% | £62 |
| Over £125,140 | 45% | 2% | £47 |
Child Benefit and the £60,000 trap
If your Adjusted Net Income exceeds £60,000, you start repaying Child Benefit through the High Income Child Benefit Charge (HICBC).
- Between £60,000–£80,000: you repay 1% for every £200 above £60,000
- Above £80,000: you repay 100% of Child Benefit
Salary sacrifice reduces your Adjusted Net Income — so it can eliminate this charge entirely.
A parent earning £65,000 with 2 children receives £2,264/year in Child Benefit but repays £1,132 via HICBC. Sacrificing £5,000/year brings their ANI to £60,000 — saving the full £1,132 charge on top of the usual tax and NI savings.
The Annual Allowance limit
You can contribute up to £60,000 per year into your pension (or 100% of your earnings, whichever is lower). This includes both employee and employer contributions.
Most people are nowhere near this limit — but it's worth knowing if you're making large additional contributions.
How to set up salary sacrifice
- Check your employer offers it — most do, but not all
- Contact HR or payroll — ask to increase your salary sacrifice pension contribution
- Agree a new amount — this changes your employment contract
- See it on your payslip — your gross pay will be lower, and so will your tax and NI
Salary sacrifice can affect mortgage affordability assessments, as lenders look at gross salary. Check with your mortgage adviser before making large changes.
Summary
- Salary sacrifice reduces your gross pay before tax and NI
- Every £100 sacrificed costs a basic rate taxpayer just £72 in take-home pay
- Higher rate taxpayers save even more — as little as £58 per £100
- Employer NI savings (13.8%) may be passed back to you
- It can eliminate the Child Benefit charge for incomes between £60k–£80k
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