Salary sacrifice sounds like a pay cut, and in a literal sense it is — but a clever one that can leave you better off. By giving up a slice of salary in exchange for a benefit, you cut the tax and National Insurance you pay, so the same money goes further.
How it works
Instead of receiving the full salary and then paying for something out of taxed income, you agree to a lower salary, and your employer provides the benefit directly. Because the money never counts as salary, it dodges income tax and National Insurance — and often the employer's National Insurance too, some of which they may pass back to you.
Where it is most useful
- Pensions — the big one. Sacrificing salary into your pension means contributions are made before tax and National Insurance, boosting what lands in your pot for the same cost.
- Cycle to work — spreads the cost of a bike out of pre-tax pay, effectively at a discount.
- Electric cars — EV schemes can be strikingly good value because company car tax on electric vehicles is currently very low.
The points to watch
A lower headline salary can affect things linked to your pay: mortgage borrowing calculations, some benefits, and statutory maternity or sick pay. There is usually a floor — you cannot sacrifice below the minimum wage. And the benefit must genuinely suit you; a cheap bike is no bargain if you will not ride it.
The takeaway
For pension saving especially, salary sacrifice is one of the most efficient tools an employee has. If your workplace offers it, the boost to your pension for no extra cost is hard to beat — just check the knock-on effects first.