Salary Sacrifice Explained: When It’s Worth It and When It’s Not
Salary sacrifice can be a smart way to boost your pension, lease an electric car, or save on tax, but it doesn’t suit everyone. In this guide, we explain how salary sacrifice works in the UK, what the benefits and drawbacks are in 2025, and how to decide whether it’s right for you.
What Is Salary Sacrifice?
Salary sacrifice is a formal agreement between you and your employer where you give up a portion of your gross salary in exchange for a non-cash benefit. This reduces your taxable income, which can lower both your Income Tax and National Insurance contributions (NICs).
Common uses of salary sacrifice include pension contributions, electric vehicle schemes, and Cycle to Work programs. The idea is simple: you pay for benefits directly out of your pre-tax income, rather than using your take-home pay.
For official government guidance, see Salary sacrifice and the effects on PAYE – GOV.UK.
How Does It Work?
Here’s a quick example for the 2025/26 tax year:
- Your gross salary: £52,000
- You sacrifice £5,000 to your pension
- Your new gross salary for tax and NICs: £47,000
As a result, you pay less Income Tax and NICs. Your take-home pay is slightly lower, but you benefit from higher pension contributions or other perks.
What Can You Use Salary Sacrifice For?
In 2025, common salary sacrifice benefits include:
- Pension contributions – boost your retirement savings and cut your tax bill
- Electric car leasing – drive a new EV with a much lower cost through Benefit-in-Kind tax breaks
- Cycle to Work scheme – buy a bike and accessories tax-efficiently
- Tech and lifestyle benefits – some employers offer gadgets, gym memberships, or mobile plans
When Salary Sacrifice Can Be Worth It
Salary sacrifice can be a great move when:
- You want to pay less tax – especially if you're close to the higher-rate threshold (£50,270 in 2025/26)
- You’re making pension contributions – both you and your employer save on NICs, and your pension grows faster
- You’re leasing an electric car – Benefit-in-Kind tax on EVs remains at just 2%, making it incredibly tax-efficient
- You want to stay under certain income thresholds – such as £50,000 (to keep Child Benefit) or £100,000 (to retain your full personal allowance)
When Salary Sacrifice May Not Be Worth It
There are some scenarios where salary sacrifice could backfire:
- You earn near the National Minimum Wage – your post-sacrifice pay must not fall below legal wage levels
- You’re applying for a mortgage – a lower gross salary might reduce the amount you can borrow
- You rely on state benefits – a lower declared income could affect your entitlement to certain benefits or credits
- You’re close to retirement – salary-based death-in-service or redundancy benefits may be reduced
- You need short-term cashflow – sacrificing salary means less take-home pay now
How It Affects Tax and National Insurance
By lowering your gross salary, you pay less:
- Income Tax – taxed only on your post-sacrifice salary
- Employee National Insurance – also reduced based on the new salary
- Employer National Insurance – your employer may pass these savings on to your pension pot
This makes salary sacrifice more efficient than paying into a pension manually after tax.
Impact on Other Benefits and Applications
Some consequences people don’t always consider include:
- Lower life cover or redundancy pay – if based on your sacrificed salary
- Child Benefit High Income Charge – salary sacrifice can help you avoid it if you earn £50,000–£60,000
- Student loan repayments – based on your lower gross income, so you repay less temporarily (but not overall)
- Mortgage applications – lenders may consider only your reduced salary
Can You Reverse a Salary Sacrifice Arrangement?
Usually no, or at least not easily. Salary sacrifice agreements are contractual and typically last for 12 months. You can’t just switch back and forth unless your circumstances change significantly (e.g. maternity leave or redundancy).
Frequently Asked Questions
Does salary sacrifice reduce my pension annual allowance?
No — the total contributions (your sacrifice + employer contributions) still count towards the annual allowance (£60,000 in 2025/26), but the tax efficiency comes from paying before tax and NI.
Can I use salary sacrifice for childcare?
The old childcare voucher scheme closed to new applicants in October 2018, so this is no longer possible unless you were already enrolled before the deadline.
Is salary sacrifice the same as a bonus sacrifice?
Not exactly — bonus sacrifice works on the same principle but applies to discretionary bonuses rather than your regular salary.
Is Salary Sacrifice Right for You?
It depends on your goals. If you’re aiming to grow your pension, lease an EV, or reduce your tax liability, it can be an excellent option. But if you're applying for a mortgage, relying on state benefits, or earning close to minimum wage, it might not be for you.
Key Takeaways
- Salary sacrifice reduces your taxable income and saves on NI and tax
- It’s most commonly used for pensions and electric car leases
- Not ideal for low earners or those applying for a mortgage soon
- Can impact benefits like life cover, maternity pay, and borrowing power
Before committing, speak with your employer or a financial adviser to understand how it would affect your personal situation.