Salary sacrifice
Salary sacrifice is a contractual reduction in pay in return for a non-cash benefit, most often a pension contribution or an electric car. Both the employee and the company save National Insurance on the sacrificed amount.
Also known as: optional remuneration arrangement
How it works
The employee agrees to a lower gross salary, and the company provides a benefit of equivalent value. Because the salary was never paid, neither employee National Insurance at 8% nor employer National Insurance at 15% applies to it. Income tax relief follows the benefit: full relief for pension contributions, and for electric cars the low benefit in kind percentage keeps the charge small.
Most benefits lost their advantage under the optional remuneration rules. The arrangements that still work are employer pension contributions, ultra-low emission and electric cars, cycle to work schemes, and workplace nurseries. Everything else is taxed on the higher of the salary given up or the benefit value, which removes the point.
The reduction has to be a genuine contractual change agreed before the salary is earned, documented in writing. A deduction made from pay after the event is not salary sacrifice and does not save anything.
Two cautions. Sacrificing below the National Minimum Wage is not permitted, and lower stated pay can affect mortgage borrowing, statutory maternity pay and state pension credit where earnings drop below the lower earnings limit of £6,500.
Who this affects
- Directors and employees making regular pension contributions
- Companies offering an electric car as part of a package
- Employees near the National Minimum Wage, who cannot sacrifice below it
- Anyone whose mortgage application depends on stated gross salary
Common mistakes
- Treating a post-payroll deduction as a sacrifice
- Sacrificing into a benefit that no longer gets favourable treatment
- Reducing pay below the lower earnings limit and losing a qualifying year
- Failing to document the change in the employment contract
Frequently asked questions
How much does salary sacrifice save?
The employee saves income tax and National Insurance at 8% or 2% on the sacrificed pay, and the company saves employer National Insurance at 15%.
Which benefits still work?
Mainly employer pension contributions, ultra-low emission and electric cars, cycle to work and workplace nurseries. Others fall under the optional remuneration rules.
Can a sole director use salary sacrifice?
Yes, though where salary is already low the saving may be small, and an ordinary employer pension contribution is often simpler.
Does it affect my mortgage or statutory pay?
It can. Lenders look at the reduced gross salary, and statutory payments and state pension credit are based on actual earnings.
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Reviewed by Waqas Sagar ACA FCCA FMAAT · Last reviewed 13 September 2026 · Figures for 2026/27 · About our practice
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