What is salary sacrifice and how does it work?
Salary sacrifice (also called salary exchange) is an agreement with your employer to receive a lower contractual salary in exchange for a non-cash benefit — most commonly a pension contribution, bike, or childcare. Because your gross salary is reduced, you pay Income Tax and National Insurance on a smaller figure, generating an immediate saving. The "sacrificed" amount goes directly to the benefit (e.g. your pension pot) before tax is calculated.
Is salary sacrifice better than personal pension contributions?
Usually yes. With a personal contribution you get Income Tax relief (at your marginal rate) via the pension provider, but you still pay employee NI on the gross amount. Salary sacrifice avoids NI as well as Income Tax, so for basic-rate payers the saving is 28p per £1 vs 20p per £1 through a personal contribution. Higher and additional rate taxpayers gain even more. The only exception is if your employer doesn't offer salary sacrifice — then personal contributions with gift aid relief are your alternative.
Does salary sacrifice affect my pension tax relief?
With salary sacrifice, the pension contribution is an employer contribution — so there's no basic-rate tax relief to claim because tax was never paid on it in the first place. This is actually better, as NI is also avoided. If you're a higher-rate taxpayer used to claiming extra relief via self-assessment, that claim is no longer needed (or relevant) for the sacrificed amount. The pension itself still grows tax-free regardless.
Can salary sacrifice take me below the National Living Wage?
No — your employer cannot sacrifice salary below the National Living Wage (£12.21/hr for over-21s in 2025/26) because NMW is calculated on contractual wages, not net pay. If you're on or near the minimum wage, you may not be eligible for full salary sacrifice. Most payroll systems will block arrangements that breach NMW.
How much does my employer save on salary sacrifice?
Your employer saves 13.8% Employer NI on every pound sacrificed. On a £5,000/yr sacrifice that's £690 per year per employee. Many forward-thinking employers pass some or all of this saving back into your pension pot as an additional contribution. It's worth asking your HR team — it's free money for both sides.
Does salary sacrifice affect my tax code?
Yes, in a good way. If you have a standard 1257L tax code, salary sacrifice reduces the taxable pay your employer reports to HMRC — so your PAYE tax should be correct automatically through payroll. You won't normally need to notify HMRC separately. However, if you use self-assessment for other reasons, the reduced gross salary will appear on your P60 and pre-populated tax return.
Is there a maximum I can sacrifice into a pension?
The pension Annual Allowance is £60,000 for 2025/26 — this covers total contributions (yours + employer). High earners above £260,000 in adjusted income may face a tapered annual allowance as low as £10,000. You can also carry forward unused allowances from the previous three tax years. There's no set minimum, though most schemes require at least 1% of salary.
Does salary sacrifice affect my mortgage application?
Potentially yes. Mortgage lenders typically use your basic/contractual salary for affordability assessments. If your contract shows the reduced (post-sacrifice) salary, some lenders may lend less. Others will accept evidence of the original salary. It's worth discussing with a mortgage broker before agreeing to a large sacrifice if you're planning to borrow soon. The effect is more pronounced for large sacrifice amounts relative to salary.