Salary Sacrifice: How It Works and What You Can Sacrifice
Salary sacrifice is a formal agreement where an employee agrees to give up part of their gross salary in exchange for a non-cash benefit provided by their employer.What Can Be Included?
Following structural tightening by HMRC, only a selective list of benefits remain highly tax-efficient under salary sacrifice rules. The most common include:
- Pension Contributions: The absolute most popular choice, as exchanging pay for direct employer pension inputs avoids heavy tax leakage.
- Electric Vehicles (EVs): This continues to be incredibly popular for the 2026/2027 tax year due to a low Benefit-in-Kind (BIK) company car tax rate of just 4% on zero-emission vehicles.
- Cycle-to-Work Schemes: Tax-free loan of bicycles and safety equipment.
- Workplace Nurseries: Approved childcare arrangements provided directly on-site or via dedicated partnerships.
What Are the Benefits?
Because your baseline contractual salary is legally reduced, you pay less income tax and Employee National Insurance (NI). Employers also save heavily on Employer NI contributions, which are 15% for the 2026/2027 tax year.
Many forward-thinking businesses choose to pass their 15% employer NI savings directly back into the employee's pension pot, compounding your retirement savings even faster.
Looking Ahead: Unlimited National Insurance relief on pension salary sacrifice remains fully open for the 2026/2027 tax year. However, a major legislative change will introduce a £2,000 annual cap on this NI exemption starting 6 April 2029, so maximizing contributions over the next few years is highly tax-advantageous.
How Does It Affect Self Assessment?
Your P60 form will naturally show your lower, adjusted gross salary figure. This post-sacrifice amount is the standard figure you enter on your Self Assessment return.
Furthermore, lowering your adjusted net income via salary sacrifice is a great way to prevent hitting the £50,270 higher-rate tax threshold or to stay below the updated £60,000 to £80,000 High Income Child Benefit Charge band.
Word of Warning
Reducing your official contractual salary can lead to unforeseen side effects. Lenders usually calculate maximum borrow limits using your post-sacrifice salary, which could shrink your potential mortgage capability. It can also impact earnings-related benefits like life insurance policies or statutory maternity pay.
Always ensure that any adjustment does not accidentally push your gross pay below the National Minimum Wage or the National Insurance Lower Earnings Limit (£6,708 for 2026/2027), which is required to secure your State Pension qualifying years.