Key points
- You save National Insurance as well as Income Tax: 8% on most pay, 2% above £50,270.
- On £35,000, a 5% pension through salary sacrifice leaves you £140.00 a year better off than the same pension through net pay.
- Your employer saves 15% employer NI too: £262.50 a year in that example. Some pass it on.
- An electric car through salary sacrifice can cost far less than its monthly price: £390.00 a month for a £500 sacrifice on £40,000.
Work out your own
Choose salary sacrifice under pension options to see your own figures.
Open the take-home pay calculatorHow salary sacrifice works
You and your employer agree to change your contract: your salary goes down, and your employer pays for a benefit instead. Because the sacrificed amount is no longer your pay, there is no Income Tax or National Insurance on it, and your employer pays no employer NI on it either.
The most common schemes are pension contributions, electric and plug-in hybrid cars, cycle to work, and extra holiday. Most other benefits bought this way are taxed as a benefit in kind, so the saving disappears.
Three ways to pay into a pension, compared
The same 5% of salary going into your pension, three ways. Each column is your take-home pay for the year.
| Salary | Into pension | Net pay | Relief at source | Salary sacrifice |
|---|---|---|---|---|
| £35,000 | £1,750.00 | £27,319.60 | £27,319.60 | £27,459.60 |
| £60,000 | £3,000.00 | £43,557.40 | £42,957.40 | £43,617.40 |
Net pay and relief at source both give you Income Tax relief; salary sacrifice adds the National Insurance saving. On £60,000 a higher-rate taxpayer using relief at source can claim back more tax through Self Assessment, which the table does not include.
Electric cars
A company car is a taxable benefit, but fully electric cars have a low benefit-in-kind rate: 4% of the list price in 2026/27. On a salary of £40,000, sacrificing £500 a month for a £45,000 electric car saves £1,200.00 of Income Tax and £480.00 of National Insurance a year, and adds £360.00 of company car tax. The car costs you £390.00 a month in take-home pay. Work out your own with the EV salary sacrifice calculator.
Things to check first
- Your new, lower salary is what lenders, statutory pay and some insurance are based on.
- You usually can't change a scheme until the next opt-in window, unless something like a new baby or a house move happens.
- Pension tax relief has an annual limit; most people are well under it.
Bottom line
Salary sacrifice is the cheapest way to pay into a pension for most employees, because it saves National Insurance that other methods don't. Check how a lower salary affects anything based on your pay before you sign up.
Tips
- Ask whether your employer adds some or all of its National Insurance saving to your pension: it is a free top-up.
- Salary sacrifice cannot take your pay below the National Minimum Wage, so it is limited on low pay.
- A lower salary can reduce statutory pay (such as maternity pay), mortgage borrowing and life cover based on salary. Check before you agree.
This guide explains the rules; it is not personal financial advice.