Salary sacrifice explained: how it works, the National Insurance saving and the knock-on effects

How it works

HMRC: "A salary sacrifice arrangement is an agreement to reduce an employee's entitlement to cash pay, usually in return for a non-cash benefit." It is set up by changing your employment contract, and you have to agree to the change. HM Treasury's description for pensions: you "agree to reduce your gross salary or sacrifice a bonus and, in return, your employer pays the same amount into your pension".

Because the sacrificed amount is no longer your pay, PAYE is run on the lower cash salary. No tax is charged on contributions an employer pays to a registered pension scheme for an employee, and employer pension contributions are free of National Insurance. HMRC's own example: a £5,000 bonus sacrificed for a £5,000 employer pension contribution means "no employment income tax or National Insurance contributions charge to the employee — the full amount is invested in the pension fund".

The saving, worked out for 2026/27

Below, the same amount goes into the pension in two ways: by salary sacrifice, or by the employee paying into a relief-at-source pension (where you pay 80% and the provider adds 20% basic rate relief). England, Wales or NI, NI category A, standard tax code, a 5% contribution:

What the difference is made of:

• £30,000: sacrificing £1,500 costs £1,080 of take-home. Income Tax falls by £300 (20%) and NI by £120 (8%). Through relief at source the same £1,500 costs £1,200. The £120 gap is the National Insurance.
• £40,000: sacrificing £2,000 costs £1,440 against £1,600 through relief at source. The £160 gap is 8% NI on £2,000.
• £60,000: sacrificing £3,000 costs £1,740. Income Tax falls by £1,200 (40%), but NI only by £60, because pay above the £50,270 upper earnings limit attracts employee NI at 2%, not 8%. Through relief at source you pay £2,400 and can claim £600 of extra relief as a higher rate taxpayer, a net £1,800 — again £60 more.

So the employee's extra saving from salary sacrifice is the National Insurance: 8% on sacrificed pay between £12,570 and £50,270 a year, and 2% above that. The Income Tax relief is the same either way, provided higher rate taxpayers using relief at source claim the extra relief.

There is an employer side too. Employers pay 15% NI on earnings above the £5,000 secondary threshold (category A, 2026/27), and employer pension contributions are free of NICs, so a sacrifice also lowers the employer's NI bill. What an employer does with that is up to the employer.

Some workplace schemes work a third way: GOV.UK describes schemes where your employer takes your own pension contributions out of your pay before deducting Income Tax. That gives Income Tax relief automatically but is a different arrangement from salary sacrifice, and it is not modelled in the table above.

What else salary sacrifice can affect

HMRC's salary sacrifice guidance lists these effects:

• National Minimum Wage: a sacrifice must not reduce your cash earnings below National Minimum Wage rates.
• Earnings-related payments: employers usually decide whether things like pension contributions, overtime rates and pay rises are based on your notional salary or the new reduced cash salary, but this must be made clear to you.
• Earnings-related benefits: salary sacrifice "can affect an employee's entitlement to earnings related benefits such as Maternity Allowance and Additional State Pension".
• Contribution-based benefits: it "may affect an employee's entitlement to contribution based benefits such as Incapacity Benefit and State Pension", because it can reduce the cash earnings on which NI is charged.
• Statutory payments: it can reduce statutory pay or remove entitlement. If your average weekly earnings fall below the lower earnings limit (£129 a week in 2026/27), your employer does not have to make statutory payments.
• Workplace pension calculations: the employer decides whether salary sacrifice changes how pension contributions are calculated; GOV.UK says employers often use a notional level of pay so participants are not disadvantaged.

Switching in and out

Each opt-in or opt-out means changing your contract. HMRC says arrangements can allow changes after lifestyle events such as marriage, divorce, or a partner becoming redundant or pregnant, but "as a general rule, if an employee swaps between cash earnings and a non-cash benefit whenever they like, any expected tax and National Insurance contributions advantages under a salary sacrifice arrangement will not apply".

Sacrifice for other benefits

For most non-cash benefits in a new arrangement, the employer has to value the benefit at the higher of the salary given up and the normal benefit-in-kind charge. The exceptions HMRC lists, which do not need to be valued or reported, are pension contributions, employer-provided pensions advice, workplace nurseries, childcare vouchers and directly contracted childcare that started on or before 4 October 2018, and bicycles and cycling safety equipment (cycle to work). Cars with CO₂ emissions of no more than 75g/km always use the normal benefit-in-kind charge.

The change from April 2029

HM Treasury's guidance (published 26 November 2025) says: "From April 2029, only the first £2,000 of employee pension contributions through salary sacrifice each year will be exempt from NICs." Contributions above £2,000 will attract employer and employee NICs like other employee workplace pension contributions, while remaining exempt from Income Tax within the usual limits. All employer pension contributions will continue to be free of NICs, employees do not need to contact HMRC, and the government says most employees making typical contributions will not be affected. Further guidance is due on GOV.UK before April 2029.

For scale: in the table above, the £30,000 and £40,000 examples sacrifice £1,500 and £2,000, within the £2,000 figure; the £60,000 example sacrifices £3,000. None of this changes the rules for 2026/27.

Frequently asked questions