Salary sacrifice arrangements are a valuable way for employers and employees to save on tax and national insurance (NI). And, following the Autumn 2024 Budget’s increase in employer NI, their popularity is set to rise.
What is salary sacrifice?
A salary sacrifice scheme is a tax-efficient way to allow an employee to exchange some of their pay for a benefit such as a pension contribution, bicycle or an electric vehicle.
The money is taken from the employee’s gross salary, before tax and NI are deducted. This means the employee saves on tax and NI while the employer reduces its NI bill.
How does it work?
An organisation can choose whether or not to offer a salary sacrifice arrangement to its employees. To partake, the employee must sign a contract with the employer agreeing to exchange some of their pay for a particular benefit.
Employees can leave a salary sacrifice scheme if they like but, to ensure the tax benefits remain, changes to the terms should only be considered where a lifestyle event such as marriage, divorce or starting a family occurs.
How do the tax breaks stack up?
For example, based on calculations from Salary Calculator:
Gillian earns £40,000 in the 2025/26 tax year. After income tax (£5,486) and NI (£2,193) are deducted, her take-home pay is £32,321. Her employer is also liable for a £5,250 employer NI bill.
If she decides to pay £4,000 into her pension from her take home pay, this would cost her £3,200 because the government adds £800 in tax relief. This would leave her with £29,121.
If, instead, she uses salary sacrifice to make the same contribution, her salary would be reduced to £36,000, giving her £29,441 after tax (£4,686) and NI (£1,873) are deducted. The employer NI due would be £4,650.00
Gillian has achieved the same pension contribution through salary sacrifice and has £320 more in her take home pay. Her employer has also saved £600 in national insurance.
Which benefits can be offered via salary sacrifice?
It used to be possible to use salary sacrifice for a wide range of benefits but the government announced it was clamping down on this tax break in the 2016 Autumn Statement.
As a result, from April 2017, employees can only use salary sacrifice for contributions to pension schemes, employer-provided pensions advice, workplace nurseries, bicycles and cycling safety including bikes-for-work schemes, and employer-provided childcare that started on or before 4 October 2018 (when the tax-free childcare vouchers scheme closed to new applicants).
Salary sacrifice is also available for vehicles, although the tax treatment is slightly different because these attract benefit-in-kind tax. However, because the benefit-in-kind rate is based on the car’s CO2 emissions, with the rate just 3% (2025/26, but rising to 5% by 2027/28) for zero emission vehicles, it is a popular option for electric and hybrid cars.
How does salary sacrifice differ to salary deduction?
For benefits that fall outside of the salary sacrifice rules, an employer could offer salary deduction.
The payment for the benefit is still taken from the employee’s salary but, unlike salary sacrifice, it is taken from net rather than gross pay. This means the employee’s salary is reduced but there are no tax or NI savings.
What are the pros of salary sacrifice?
The tax breaks are the key pro for employers and employees, with both seeing reduced NI bills and employees cutting the income tax they pay. The employer NI saving is particularly compelling given the increase in the rate from 13.8% to 15% in April 2025.
Some employees may be able to use salary sacrifice as a tax planning tool, helping them to bring their earnings below the thresholds for child benefit (£60,000) or to retain the personal allowance (£100,000).
Offering salary sacrifice can also enhance the employee benefits package, potentially leading to a happier and more engaged workforce.
What are the cons of salary sacrifice?
There are disadvantages for both parties too. For employers, it is the extra administration. Employment contracts and payroll will need to be amended in line with regulations.
On the employee side, the potential downside is the lower salary. This could affect their ability to borrow money but also any earnings-related employee benefits such as life insurance and maternity or paternity pay and percentage-based pension contributions and pay rises.
Employers can lessen this blow by using notional full salary for calculations plus many lenders now accept a declaration of the full salary for their lending criteria.
What do employers need to consider?
As well as choosing whether to offer salary sacrifice, employers may also want to weigh up whether to pass on their NI savings. Some employers do, boosting an employee’s pension contribution as an example, while others prefer to retain some or all of the savings.
Employers also need to be mindful of how much income employees sacrifice. Salaries must not fall below the national minimum wage (NMW) or the lower earnings limit.
Additionally, to maximise value, they will need to make sure employees understand how salary sacrifice works.
