Salary Sacrifice Explained — 2025/26 Guide
Salary sacrifice is an arrangement where you agree to give up part of your gross salary in exchange for a non-cash benefit. Because your contractual pay is lower, you pay less income tax and National Insurance — and so does your employer. It’s one of the most powerful legal tax-saving tools available to UK employees.
How Salary Sacrifice Works — Step by Step
Tax & NI Savings on a £5,000 Pension Sacrifice
| Salary | Tax Saved | NI Saved | Total Saved | Effective Cost |
|---|---|---|---|---|
| £30,000 | £1,000 (20%) | £400 (8%) | £1,400 | £3,600 for £5,000 into pension |
| £50,000 | £1,000 (20%) | £400 (8%) | £1,400 | £3,600 for £5,000 into pension |
| £80,000 | £2,000 (40%) | £100 (2%) | £2,100 | £2,900 for £5,000 into pension |
Bonus:Your employer saves 13.8% employer NI on the sacrificed amount (£690 on £5,000). Many employers add some or all of this to your pension contribution, meaning you could get up to £5,690in your pension for a net cost of £2,900–£3,600.
Pension Salary Sacrifice — Worked Example
Worked Example: £55,000 Salary, £5,000 Pension Sacrifice
| Without | With Sacrifice | |
|---|---|---|
| Gross salary | £55,000 | £50,000 |
| Income tax | £8,486 | £7,486 |
| Employee NI | £3,110 | £2,994 |
| Take-home pay | £43,404 | £39,520 |
| Reduction in take-home | — | £3,884 |
| Into your pension | — | £5,000+ |
You pay £3,884 less in take-home but £5,000+ goes into your pension. That’s an instant 29% return before any investment growth.
Electric Vehicle (EV) Salary Sacrifice
EV salary sacrifice is extremely tax-efficient because the Benefit in Kind (BIK) rate for pure electric cars is just2% in 2025/26 (rising to 3% in 2026/27).
Worked Example: EV at £500/month Sacrifice
| Monthly sacrifice | £500 |
| Annual sacrifice | £6,000 |
| Car list price (example) | £40,000 |
| BIK value (2% of £40,000) | £800/year |
| BIK tax (40% taxpayer) | £320/year |
| Income tax saved (40%) | £2,400/year |
| NI saved (2%) | £120/year |
| Net annual saving vs PCP | £2,200+ |
Includes insurance, maintenance, and road tax in the lease. Savings are even greater for basic-rate taxpayers due to the 8% NI saving.
Cycle to Work Scheme
You can sacrifice up to £1,000(some employers allow more via enhanced schemes) for a bike and accessories. A basic-rate taxpayer saves 28% (20% tax + 8% NI), meaning a £1,000 bike costs you around £720.
What Salary Sacrifice Affects
| Area | Impact |
|---|---|
| Mortgage affordability | Lenders may use your lower contractual salary, reducing how much you can borrow |
| Statutory Maternity Pay | Based on lower salary — could reduce SMP if near the threshold |
| State pension | Not affected as long as salary stays above the Lower Earnings Limit (£6,396) |
| Student loan repayments | Calculated on lower salary — you’ll repay less each month |
| Life / income protection | May pay out based on lower salary — check your policy |
| Child Benefit (HICBC) | Sacrifice can bring you below £60,000 and reduce or eliminate the charge |
Calculate Your Savings
Use our salary sacrifice calculator to see exactly how much you could save on tax and NI, and how it affects your take-home pay.
Open Salary Sacrifice Calculator →Last updated for the 2025/26 tax year (6 April 2025 – 5 April 2026).