What is salary sacrifice in the UK?

Salary sacrifice is a contractual arrangement where you give up part of your gross salary in exchange for a non-cash benefit, typically a larger employer pension contribution. Because your gross pay is reduced before tax and National Insurance are calculated, you pay less income tax and NI. HMRC calls this 'optional remuneration arrangement' (OpRA).

How much tax do I save with salary sacrifice for pensions?

You save income tax (20%, 40%, or 45% depending on your band) plus employee National Insurance (8% on earnings between £12,570-£50,270, 2% above). Your employer also saves 15% employer NI from April 2025. Many employers pass some or all of their NI saving into your pension, increasing the benefit further.

Does salary sacrifice affect my mortgage application?

Yes. Most lenders assess affordability based on your gross salary, which is lower after sacrifice. A £5,000 sacrifice at 4.5x income multiple reduces borrowing capacity by £22,500. However, some lenders accept a letter from your employer confirming the sacrifice can be reversed. Speak to a mortgage broker before applying.

Can I use salary sacrifice for an electric car?

Yes. Electric car salary sacrifice is one of the most tax-efficient benefits in the UK. The Benefit in Kind (BIK) rate for zero-emission vehicles is just 2% for 2025/26. Combined with income tax and NI savings on the sacrificed salary, you can save 30-60% compared to buying or leasing privately.

Salary Sacrifice Calculator

Q: What is the child benefit High Income Child Benefit Charge (HICBC)?

If you or your partner earn over £60,000, you must repay 1% of your child benefit for every £200 of income above £60,000. At £80,000 it's fully clawed back. Salary sacrifice reduces your adjusted net income, potentially bringing you below the threshold and letting you keep more child benefit.

Calculate your tax and National Insurance savings from salary sacrifice. Compare pension sacrifice, cycle to work, and electric car schemes. Check the impact on child benefit, maternity pay, and mortgage affordability.

See how much you save by sacrificing salary into your pension

Annual gross salary

Your salary before any deductions

Current pension contribution

Your existing employee pension %

Sacrifice input method

Additional sacrifice

Extra % to sacrifice into pension

Student loan plan

Plan 1: pre-2012, Plan 2: post-2012, Plan 4: Scotland

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How to Use This Calculator

Pension Sacrifice tab

The default tab. Enter your annual gross salary, current pension contribution %, and additional sacrifice amount (as a percentage or fixed amount). The calculator shows your income tax saved, employee NI saved (8%/2%), employer NI saved (15%), total tax savings, how much goes into your pension, and the effective cost of £1 in your pension pot. Add your student loan plan in "More options" to see repayment savings.

Other Sacrifices tab

Select a sacrifice type — Cycle to Work (up to £1,000 or unlimited for e-bikes), electric car salary sacrifice (2% BIK rate for 2025/26), childcare vouchers (legacy scheme), or tech scheme. Enter the retail value and see your tax and NI savings, net cost vs retail price, and annual saving.

Impact on Benefits tab

Before committing to any sacrifice, check for unintended consequences. Enter your salary, proposed sacrifice, and tell us about children, pending mortgage, and maternity plans. The calculator checks your statutory maternity/paternity pay, child benefit HICBC clawback, mortgage borrowing capacity, student loan repayments, and state pension qualifying years.

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The Formula

Salary sacrifice reduces your gross pay before tax and NI are calculated. You save three types of deduction:

Total Savings = Income Tax Saved + Employee NI Saved + Student Loan Saved

Income Tax Saved = Sacrifice × Marginal Tax Rate (20% / 40% / 45%)
Employee NI Saved = Sacrifice × NI Rate (8% up to £50,270, 2% above)
Employer NI Saved = Sacrifice × 15% (from £5,000 threshold)

Effective Cost of £1 in Pension = Net Pay Reduction ÷ Sacrifice Amount

The key advantage of salary sacrifice over a personal pension contribution is NI savings. With relief at source (the normal pension method), you get income tax relief but still pay NI on your full salary. Salary sacrifice eliminates both.

For a higher-rate taxpayer earning £60,000 who sacrifices £5,000: income tax saving = £2,000 (40%), employee NI saving = £100 (2%), employer NI saving = £750 (15%). Each £1 in the pension costs roughly £0.58 in take-home pay.

Example

Alex — Software Engineer, 32, Manchester

Alex earns £55,000, currently contributes 5% to their workplace pension (£2,750/year), and wants to sacrifice an additional 5% (£2,750) into their pension. Alex has a Plan 2 student loan.

Pension Sacrifice tab

Gross salary£55,000

Current pension (5%)£2,750

Additional sacrifice (5%)£2,750

Income tax saved (40%)£1,100

Employee NI saved (2%)£55

Employer NI saved (15%)£413

Student loan saving£248

Total tax & NI savings£1,403

Alex’s £2,750 sacrifice costs only £1,347 in take-home pay. If the employer passes their NI saving through, £3,163 goes into the pension pot for a net cost of £1,347 — an effective cost of £0.43 per £1 of pension.

Impact on Benefits tab

New gross salary£52,250

Mortgage capacity (4.5×)£235,125 (was £247,500)

State pension qualifyingYes — well above LEL

Alex isn’t planning a mortgage or expecting a child, so the reduced gross salary has no practical impact. The tax savings make salary sacrifice clearly worthwhile.

FAQ

What is salary sacrifice? ▼

Salary sacrifice (also called “salary exchange” or “SMART pensions”) is a contractual agreement between you and your employer. You give up part of your gross salary in exchange for a non-cash benefit — most commonly a larger employer pension contribution. Because your contractual pay is lower, you pay less income tax and National Insurance. HMRC refers to this as an Optional Remuneration Arrangement (OpRA). It must be agreed before the salary is earned.

Is salary sacrifice worth it for pensions? ▼

For most employees, yes. The main advantage over relief at source (the standard pension method) is that you also save National Insurance. A basic-rate taxpayer saves 28% (20% tax + 8% NI) on each pound sacrificed, compared to just 20% with a personal contribution. Higher-rate taxpayers save 42% (40% + 2%) or more. Your employer also saves 15% NI from April 2025, and many pass some or all of that saving into your pension. The only downsides are a lower gross salary (affecting mortgage applications and statutory pay) and reduced flexibility.

How does salary sacrifice affect child benefit? ▼

The High Income Child Benefit Charge (HICBC) applies when you or your partner has adjusted net income above £60,000. You repay 1% of your child benefit for every £200 of income above £60,000, and at £80,000 it’s fully clawed back. Salary sacrifice reduces your adjusted net income, so it can reduce or eliminate the HICBC. For example, sacrificing £5,000 on a £65,000 salary brings you to £60,000 — eliminating the charge entirely.

What about electric car salary sacrifice? ▼

Electric car salary sacrifice is exempt from the OpRA rules, making it one of the most tax-efficient benefits available. The Benefit in Kind (BIK) rate for zero-emission vehicles is just 2% for 2025/26. You pay income tax and NI only on this tiny BIK amount, rather than the full salary sacrificed. The package typically includes insurance, maintenance, road tax, and breakdown cover. A £40,000 EV could save a higher-rate taxpayer £10,000+ compared to buying outright.

Can my employer refuse salary sacrifice? ▼

Yes. Salary sacrifice is a voluntary arrangement and your employer is not obliged to offer it. However, most large employers do, because they also save on employer NI contributions. If your employer doesn’t offer it, it’s worth asking HR — the employer saves 15% NI on every pound sacrificed, so there’s a clear incentive. Your employer cannot reduce your salary below the National Minimum Wage or National Living Wage through salary sacrifice.

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