Salary sacrifice lets you exchange part of your salary for non-cash benefits, reducing both income tax and National Insurance. Here's how to use it in 2026.
Salary sacrifice: Salary sacrifice is an agreement between you and your employer to reduce your gross salary in exchange for a non-cash benefit of equal value — most commonly a pension contribution, electric vehicle, or childcare voucher. Because your official salary is lower, you pay less income tax and National Insurance on the sacrificed amount.
This is the most common and valuable form of salary sacrifice. Instead of making pension contributions from your net pay, your employer reduces your gross salary and pays the equivalent directly into your pension.
The saving depends on your tax band:
| Tax band | Tax saving per £1 sacrificed | NI saving per £1 | Total saving |
|---|---|---|---|
| Basic rate (20%) | 20p | 8p | 28p |
| Higher rate (40%) | 40p | 2p | 42p |
| In the 60% trap zone | 60p | 2p | 62p |
EV salary sacrifice has grown rapidly since the Benefit in Kind (BiK) rate for electric vehicles was reduced to 2% (rising 1% per year to a maximum of 5%). The scheme works by leasing an EV through your employer from your gross salary.
Salary sacrifice reduces your official gross salary. This has implications to consider:
For most employees, yes — particularly for pension contributions. A basic rate taxpayer saves 28p per £1 sacrificed (20% tax + 8% NI). A higher rate taxpayer saves 42p per £1. In the £100k–£125k personal allowance trap zone, savings can reach 62p per £1.
It can. Lenders use your contractual (post-sacrifice) salary for affordability calculations. If you are applying for a mortgage, consider whether reducing your salary figure affects your borrowing capacity before entering a new scheme.
Salary sacrifice must be arranged by your employer — you cannot do it unilaterally. However you can make personal pension contributions and claim tax relief through self-assessment. The NI saving only applies to salary sacrifice, not personal contributions.
The annual pension allowance is £60,000 in 2026/27 (or 100% of your earnings if lower). This is the maximum you can contribute across all pension schemes while still receiving tax relief.
The free salary calculator lets you model pension contributions and see the exact impact on your monthly pay.
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