What’s salary sacrifice?

Salary sacrifice allows you to give up some of your gross salary and for the tax and National Insurance (NI) and, if applicable, income tax savings made to be used to either help increase the pension contributions being paid or for your take-home pay to be increased. This is done at no additional cost to you or your employer.

Salary sacrifice may not be suitable or may only have a minimal benefit for employees with low earnings. HM Revenue & Customs guidance also states that a salary sacrifice arrangement must not reduce an employee's cash earnings below National Minimum Wage rates.

The examples below show you how this works.

  • You won’t pay NI on the amount you sacrifice, so you can either:
    • increase your level of contribution with no impact on your take-home pay, increasing the size of your fund; or
    • keep the same level of pension contribution while increasing your take-home pay.
  • Your employer will also save on their NI payments and might share these savings to increase your contributions even further.
  • It’s easy for you, as your employer makes all the arrangements.

As the value of investments can fall as well as rise, the value of your pension pot isn't guaranteed and the final value may be less than has been invested.

Salary sacrifice is a formal agreed change to your contractual terms and conditions. You can normally change the amount you sacrifice – increase or decrease the amount. However your employer may have rules around when you can do this, for example if you have a relevant ‘lifestyle event’ such as getting married. You can also opt out of salary sacrifice at any time.

Salary sacrifice isn’t always suitable for everyone. You should think about:

  • the impact on any other benefits that are linked to salary, for example sick pay, working tax credit/child tax credit, basic State Pension, death benefits or overtime, although it's still possible for an employer to use a 'notional' or pre-sacrifice salary for these benefits;
  • mortgage lending that may be linked to actual salary received; and 
  • statutory benefits which may be affected by a reduction in salary, for example statutory maternity and paternity pay. 

If you want more information on the suitability of salary sacrifice, you should get professional financial advice.

Let’s look at an employee subject to UK tax with a gross salary of £24,000 in the 2020/21 tax year.

Before salary sacrifice

Making a personal contribution of £960 (net), a year into their plan.

Which after tax relief from the government, of 20%, is added, is a gross contribution of £1,200. 

And their take-home pay is £19,000.

£24,000 Gross salary
£4,040 Income Tax and NI*
£960 Personal contributions (net)
£19,000 Take-home pay £1,200 Pension contribution

Saving with salary sacrifice

They choose to give up £1,412 of their gross salary and, in exchange, their employer pays the increased amount of £1,412 into their plan, as an employer contribution.

Their take-home pay is not affected and stays at £19,000.

£22,588 Gross salary
£3,588 Income Tax and NI*
Nil Personal contributions (net)
£19,000 Take-home pay £1,412 Pension contribution

Boost take-home pay

In this example the employee chooses to keep their pension contribution of £1,200 the same (as it was without salary sacrifice).

And use salary sacrifice to boost their take-home pay to £19,144.



£22,800 Gross salary
£3,656 Income Tax and NI*
Nil Personal contributions (net)
£19,144 Take-home pay £1,200 Pension contribution

  • These examples are based on our understanding of current taxation law and HM Revenue & Customs practice, which may change.
  • These amounts shown are only examples and aren’t guaranteed.

So by saving with salary sacrifice they’ve increased:

  • their pension contribution to £1,412 (increase of £212) while maintaining their take-home pay of £19,000; or
  • their take-home pay to £19,144 (increase of £144) while maintaining a pension contribution of £1,200.

The contributions before sacrifice are paid as employee contributions but these change to employer contributions after sacrifice. 

*These figures are based on the tax and National Insurance rates for 2020/21. In these examples, none of the employer NI saving is added to the pension contribution after sacrifice. 

Your employer won’t pay employer’s NI on the salary you give up and may choose to share the savings with you by increasing how much it contributes to your pension.

If your employer is passing on any of their NI saving, let’s look at how may also increase contributions to your pension. This example is based on them passing on all 13.8% of their NI saving as well as making an employer contribution of £1,200 a year.

£1,412 Pension contribution with salary sacrifice
£1,200 Employer contribution
£195 Employer NI saving
£2,807 Total pension contribution (an increase of £407**)

The amount of NI saving your employer shares is entirely at their discretion and they may change it at any time, for example in response to changes to employer NI rates or changes to HM Revenue & Customs rules governing salary sacrifice. If there are any changes, they’ll let you know.

**Compared with contributions before salary sacrifice.

Important notes

  • These examples are based on our understanding of current taxation law and HM Revenue & Customs practice, which may change.
  • The amounts shown are only examples and aren’t guaranteed.
  • The value of any tax relief will depend on individual circumstances.