What is salary sacrifice?

What is salary sacrifice?

Salary sacrifice sounds quite dramatic. But in reality, salary sacrifice arrangements between employers and employees – set out in an employment contract – are simply ways to help employees save tax while still receiving the same overall value of pay and benefits.

In effect, the sacrifice works by organising things in a better order – getting the benefit before tax, not after. That means agreeing to have part of your salary paid to you in the form of a cash or non-cash benefit, rather than buying the same benefit out of your take-home pay. 

In this example, the extra £1,120 is tax and National Insurance that never get charged. So, you end up with the same pension contributions, but more money left in your pocket. 

Is salary sacrifice worth it?

Salary sacrifice is usually “worth it” if you want the benefit anyway and would otherwise pay for it out of your take-home pay. Over time, the savings can really add up. For someone making a £4,000 pension salary sacrifice each year, the cumulative effect looks like this:

It’s hard to argue with the tax saving. But there is one reason why salary sacrifice may not always be “worth it”. Namely, because it lowers your official salary, and some things are based on that number. 

Let’s say, for example, that you earn £40,000 and you commit £4,000 to a salary sacrifice scheme to put more in your pension. This works well, until you go on maternity leave and your employer only pays out 90% of £36,000 in statutory cover (relevant for the first six weeks). 

And what if you go to a bank or a lender with the hope of getting a mortgage to buy a house? They ask, “what do you make?” You say “£40,000.” And they say, “no you don’t – says here your contractual salary is only £36,000.”  You could be denied the mortgage unless you opt out of the scheme. Take-home pay can also dictate your income insurance coverage. 

Whether it’s right for you depends on your situation and your plans. A free 15-minute consultation with a financial coach can help you think clearly. 

What is salary sacrifice for pensions?

This is where salary sacrifice is most widely used.

You agree to give up part of your salary and your employer pays that amount into your pension. For tax purposes, this counts as an employer contribution. If you had paid into a pension from your take-home pay, you would have paid employee National Insurance on that income first.

This is where the tax savings mainly come from. 

Employees currently pay 8% National Insurance on earnings above the main threshold and below the higher rate tax threshold, and employers pay 13.8%. When salary is sacrificed, both sides save on those contributions. Your employer might even pass some or all of their National Insurance into your pension as well.

The only current limit to tax advantages on pension contributions is the annual allowance of £60,000, which tapers down for higher earners. But future tax rules will drastically change how generous the National Insurance treatment is. From April 2029, an annual cap of £2,000 will be placed on salary sacrifice into pensions. Beyond this cap, the National Insurance benefits will stop. 

To learn more about this, check out our analysis of the 2025 Budget for business owners and employers. 

How does salary sacrifice work for a car?

Salary sacrifice works for a car in much the same way as pensions. You give up part of your gross salary in return for the use of a car, typically including the lease, insurance and servicing. The cost is taken from your salary before income tax and National Insurance.

The main difference between using salary sacrifice for a car compared with for pension contributions is that while that you can usually opt in and out of pensions every year, salary sacrifice for a car can involve a longer commitment. Car leases usually run for a number of years, and there can be exit charges if you leave your employer and their scheme.

Tax treatment also depends on the type of car. Salary sacrifice cars are taxed as company cars, which means you pay what’s known as a Benefit-in-Kind tax. This is a percentage of the benefit’s value. For the 2025/2026 tax year, the rates look like this for cars:

• 2-3% for electric vehicles
• 3-15% for plug-in hybrid electric vehicles, depending on electric range.
• 15-37% for petrol or diesel cars, depending on their CO2 emissions (g/km). 

The bottom line is salary sacrifice is there to save you tax. But as these Benefit-in-Kind taxes show, the driving idea is to encourage people to make certain choices – choosing low-emission cars; funding private pensions; supporting childcare with childcare vouchers; using cycle-to-work schemes – things the government wants. But no scheme is perfect for everyone.

Does salary sacrifice affect a mortgage?

Potentially, yes – and it’s worth being aware of this if you have plans to buy a property soon. 

Mortgage lenders typically assess affordability using your take-home salary. If your official take-home salary has been reduced because of salary sacrifice, that lower figure may be what appears on payslips and employment references when the lender runs its checks.

Some lenders are willing to look through salary sacrifice and assess affordability using your pre-sacrifice income, especially when the sacrifice is for pensions. But others are stricter.

Will salary sacrifice prevent you from getting a mortgage? No. But it can reduce the headline amount you are offered. If you’re planning to apply for a mortgage, it’s sensible to check how that lender treats salary sacrifice before making any long-term decisions.