What Is Salary Sacrifice?

With salary sacrifice, your employer reduces your contractual salary and pays the sacrificed amount directly into your pension (or another qualifying benefit, like a cycle-to-work scheme or electric car lease) instead. Because the money never counts as your salary in the first place, it avoids Income Tax and, critically, National Insurance on both the employee and employer side, which a standard "take the salary and contribute to your pension yourself" approach doesn't achieve.

For a UK higher-rate taxpayer, a £5,000 salary sacrifice into a pension can save around £2,100 in combined Income Tax and NI, meaning the real cost to your take-home pay is closer to £2,900 for a £5,000 pension contribution. The exact saving depends on your marginal rate at the point the sacrifice applies.

The main downside is that it reduces your headline salary, which can occasionally affect salary-linked calculations like mortgage affordability assessments or statutory redundancy pay, worth checking before committing to a large sacrifice arrangement if either is relevant to you.