Salary sacrifice, explained

Salary sacrifice sounds like you're giving something up. You are — but in the right hands it's one of the few moves that beats almost everything else, because it's the only way an ordinary employee can save National Insurance as well as income tax. Here's how it works, where it shines, and the small print that trips people up.

How salary sacrifice works

You agree with your employer to give up part of your gross (pre-tax) salary in exchange for a non-cash benefit — most commonly a bigger employer pension contribution, but also an electric car or a cycle-to-work bike. Because tax and National Insurance are charged on your reduced cash pay, you pay less of both. The benefit itself is delivered tax-efficiently. It has to be a genuine, forward-looking change to your contract — you can't sacrifice pay you've already earned.

The National Insurance saving

This is the bit ordinary pension contributions can't match. In 2025-26, employees pay National Insurance at:

When you sacrifice salary into a pension, you don't just save income tax — you save the 8% (or 2%) employee NI on the sacrificed amount too. Relief at source, by contrast, only ever gives back income tax. And many employers pass on some or all of their 15% NI saving into your pension as well, which is free money on top.

A pension worked example

Tom earns £50,000 and sacrifices £5,000 of salary into his workplace pension. He's a basic-rate taxpayer on most of that band:

For a higher-rate taxpayer the income-tax saving rises to 40%, making the combined benefit around 48% — versus the 40% you'd eventually get through relief at source, and only after claiming it back.

Electric cars and other benefits

Pensions are the classic sacrifice, but a few others still work brilliantly:

• Electric company cars are the standout. The taxable benefit-in-kind on a pure EV is just 3% of list price in 2025-26 (rising to 4% in 2026-27 and 5% in 2027-28). Sacrifice salary for an EV and you swap fully-taxed pay for a benefit taxed at a tiny rate — often saving 30–40% on the cost of the car.
• Cycle-to-work bikes remain tax- and NI-free within the scheme rules.
• Workplace nurseries provided by the employer are exempt — though the old childcare voucher scheme is closed to new joiners.

The OpRA rules

Since April 2017, the Optional Remuneration Arrangement (OpRA) rules removed the tax advantage for most sacrificed benefits — the benefit is now taxed on the higher of the cash you gave up or its normal value. But four things were deliberately left with their advantage intact:

• Employer pension contributions (and pension advice).
• Employer-provided childcare / workplace nurseries.
• Cycle-to-work schemes.
• Ultra-low-emission cars (≤75g/km CO₂ — i.e. EVs and some plug-in hybrids).

These four are why pensions and EVs are still the headline acts of salary sacrifice.

The pitfalls

Used well — and especially if you're near the £100,000 trap, where sacrifice also restores your Personal Allowance and childcare — it's one of the cleanest tax wins available to an employee.