Salary Sacrifice Explained: How It Works
Salary sacrifice swaps part of your pay for a benefit such as pension contributions, and saves both tax and National Insurance.
What it is
With salary sacrifice you agree to a lower salary, and your employer pays the difference into a pension (or another benefit such as a cycle scheme) instead. Because your official salary is lower, you pay less Income Tax and less National Insurance.
How much does it save?
Take a £40,000 salary with a 5% (£2,000) pension contribution:
| Method | Take-home per year | Cost to you of the £2,000 pension payment |
|---|---|---|
| No pension | £32,320 | – |
| Net pay arrangement | £30,720 | £1,600 |
| Salary sacrifice | £30,880 | £1,440 |
The £2,000 goes into your pension either way, but under salary sacrifice it costs you about £-160 less a year because you save National Insurance too.
Things to check first
- Your lower salary can affect mortgage affordability, because lenders use your salary.
- It can reduce statutory pay such as maternity pay, which is based on your earnings.
- Your pay cannot fall below the National Minimum Wage after the sacrifice.
- Life cover and some benefits linked to salary may fall.
- It needs a change to your contract, which your employer must agree.
See how different pension types change your pay with our take-home pay calculator.
This guide is general information, not financial or legal advice. Rates checked 8 October 2026 against GOV.UK.
Related
- Take-Home Pay Calculator
- The 60% Tax Trap: Earning Between £100,000 and £125,140
- How National Insurance Works in the UK
Figures are for the 2026/27 tax year from official sources and are estimates for guidance only, not financial or legal advice. Printed from ukanswers.co.uk.