What is salary sacrifice?

Salary sacrifice (also known as salary exchange) allows you to give up some of your salary in exchange for extra benefits from your employer. It’s a tax-efficient way to receive benefits and/or to make extra contributions to your pension. As a result, you will pay lower national Insurance contributions, and in some circumstances, also pay less in tax.

Many employers offer salary sacrifice schemes, allowing employees to swap a portion of their salary for non-cash benefits, such as technology or a bicycle. This is also known as salary sacrifice, and one of its most common applications is in pension contributions. By doing so, your take home pay will increase.

Sounds great, can everyone do it?

Not everyone can take part in a salary sacrifice. If you earn a lower wage, it might not be possible to reduce your salary enough because your pay must stay above the national minimum wage. Your employer will let you know if you can take part in any of the schemes they provide.

Salary sacrifice is arranged by making a small adjustment to your employment contract with your employer so you'll receive a contractual change agreement when you take part in any salary sacrifice schemes.

When you give up part of your wages through a salary sacrifice scheme, the deduction is made before you pay tax or national insurance which reduces the amount of tax and national insurance you have to pay. For some benefits, you'll still pay tax, but this will be applied at the end of the tax year or via your payslip each time you are paid. Benefits exempt from tax and national insurance are:

Does my employer save money too?

With a pension salary sacrifice scheme, your employer saves on national insurance contributions and may choose to pass these savings on to you through enhanced benefits or increased pension contributions. While some other benefit schemes can also generate national insurance savings for employers, this is not always the case.

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