Salary Sacrifice UK 2025 — How to Cut Tax on Pensions, Childcare and Electric Cars
Salary sacrifice is one of the most tax-efficient tools available to UK employees — and millions of people are not using it, or are not using it to its full potential. By arranging for your employer to pay certain benefits directly from your pre-tax salary, you reduce your taxable income, save income tax, and reduce National Insurance contributions for both you and your employer. This guide explains how it works, what you can sacrifice, and how much you could save.
What Is Salary Sacrifice?
Salary sacrifice (also called salary exchange) is an arrangement where you agree to give up part of your cash salary in exchange for a non-cash benefit provided by your employer. Because your contractual salary is reduced by the sacrifice amount, you pay income tax and National Insurance on a lower gross pay — saving money on both. The benefit you receive in its place is either entirely free of tax and NI or subject to lower rates than the equivalent cash salary.
Salary sacrifice requires an amendment to your employment contract — you formally agree to take a lower salary. This is an important distinction from simply contributing to a pension from your take-home pay (which still saves tax through pension tax relief but does not save National Insurance). Salary sacrifice saves NI; personal contributions alone do not.
The employer also benefits from salary sacrifice because they pay employer NI (13.8%) on your reduced salary rather than your full salary. Many employers pass on all or part of their NI saving to the employee, making the arrangement even more valuable.
How Much Can You Save?
The saving depends on your income tax band and the type of benefit. For every £1,000 sacrificed:
Basic Rate Taxpayer (20%)
Income tax saving: £200
Employee NI saving: £80 (8% on earnings above £12,570)
Total saving: ~£280 per £1,000 sacrificed
Higher Rate Taxpayer (40%)
Income tax saving: £400
Employee NI saving: £20 (2% on earnings above £50,270)
Total saving: ~£420 per £1,000 sacrificed
On top of this, many employers add their NI saving (13.8% of the sacrificed amount) to the benefit — particularly for pension contributions. An employer who passes on their full NI saving on a £1,000 sacrifice adds £138, turning a £1,000 pension contribution into £1,138 in the pension fund — all from money that would otherwise have been partially swallowed by tax and NI.
Pension Salary Sacrifice — The Most Valuable Use
The most widely available and financially significant salary sacrifice arrangement is for pension contributions. Instead of paying your pension contributions personally (which saves income tax but not NI), you arrange for your employer to pay an equivalent amount as an employer pension contribution from your pre-tax salary. The effect is identical in terms of how much goes into your pension — but you save NI on the amount sacrificed.
Example
Tom earns £45,000 and contributes 5% of his salary (£2,250) to his workplace pension. Currently he pays these as employee contributions, saving income tax at 20% (£450) but not NI. If he switches to salary sacrifice, he also saves employee NI at 8% (£180) — an extra £180 per year for no change in take-home and no change in pension contribution. Over a working career, this compounds significantly.
Effect on the Child Benefit Charge
Pension salary sacrifice reduces your adjusted net income (the measure used for the High Income Child Benefit Charge). For parents earning between £60,000 and £80,000, increasing pension sacrifice can eliminate or reduce the HICBC. See our Child Benefit Tax Charge guide for details.
Annual Allowance
Total pension contributions (employee plus employer) cannot exceed the annual allowance — £60,000 per year for 2025/26, or 100% of earnings if lower. Those who have flexibly accessed their pension have a lower Money Purchase Annual Allowance (MPAA) of £10,000. Contributions above the annual allowance are subject to a tax charge, so check your position before increasing contributions significantly.
Tax-Free Childcare and Workplace Nurseries
Workplace Nursery Salary Sacrifice
If your employer runs or partners with a workplace nursery, you may be able to sacrifice salary to pay for childcare entirely free of tax and NI — with no cap on the benefit. This is highly valuable for parents with young children. The key requirement is that the nursery or childcare facility must be provided partly by the employer — a pure childcare voucher scheme (which was closed to new entrants in 2018) is different.
Tax-Free Childcare (Government Scheme)
Separately from salary sacrifice, the government's Tax-Free Childcare scheme allows working parents earning under £100,000 per year to open a childcare account where for every £8 you put in, the government adds £2 — giving an effective 20% top-up on up to £10,000 of childcare per child per year (£500 government contribution). This is not salary sacrifice — it is a government subsidy — but combined with salary sacrifice for childcare, the savings are substantial.
Electric Vehicle Salary Sacrifice
Company car salary sacrifice for electric vehicles has become one of the most valuable perks available to employees in the UK, particularly since the government set benefit-in-kind (BIK) rates for fully electric cars at just 2% of the car's list price from 2022/23, rising very gradually to 5% by 2027/28. The combination of low BIK rates and NI savings makes electric car salary sacrifice exceptionally cost-effective.
How It Works
You sacrifice salary to cover the lease cost of an electric vehicle. The BIK tax payable is 2% of the car's list price (for 2025/26). For a £40,000 car, the BIK value is £800 per year. A higher-rate taxpayer pays 40% of £800 = £320 in tax — a remarkably low amount for a £40,000 car. Compare this to a petrol or diesel car at 25–37% BIK rate, where the same £40,000 car would generate a BIK tax charge of £4,000–£5,920 per year.
The salary sacrifice for the lease cost saves income tax and NI on the sacrificed amount, offsetting much of the BIK cost for lower-emission vehicles. For many higher-rate taxpayers, an electric car through salary sacrifice actually costs less in total tax and NI than the equivalent cash to buy or lease the car personally.
Cycle to Work Scheme
The Cycle to Work scheme allows you to sacrifice salary to obtain a bicycle and safety equipment. The exemption applies to bikes used "mainly" for commuting. The salary sacrifice saves income tax and NI on the cost, giving an effective discount of 32–52% depending on your tax band. Most schemes are capped at £1,000 (or higher for electric bikes, where the cap is typically £2,000–£5,000 depending on the provider). After the hire period, you can purchase the bike at a market value rate set by HMRC.
Other Benefits Available via Salary Sacrifice
- Mobile phones — one mobile phone per employee, free of BIK tax
- Additional annual leave — some employers allow salary sacrifice to buy additional holidays
- Health screenings and medical insurance — although private medical insurance attracts BIK, sacrificing salary can still produce a NI saving
- Season ticket loans — not strictly salary sacrifice but a tax-free employee benefit through employer loans
Limitations and Considerations
National Minimum Wage
Salary sacrifice cannot reduce your cash pay below the National Minimum Wage. For lower-paid workers, this limits how much can be sacrificed. Employers must check that the reduced cash salary after sacrifice remains above the NMW for all hours worked.
Impact on Mortgage Applications
Salary sacrifice reduces your stated gross salary on payslips and P60. Some mortgage lenders calculate borrowing capacity based on gross salary — a lower gross salary can reduce the mortgage amount available. Check with your mortgage adviser before significantly increasing salary sacrifice, particularly if you are planning to apply for a mortgage.
Maternity and Paternity Pay
Statutory Maternity Pay and Paternity Pay are calculated based on average weekly earnings during the qualifying period — which means SMP and SPP may be lower if you have been on salary sacrifice. Some employers compensate for this in their enhanced maternity pay policy; others do not.
State Benefits
Some state benefits (including statutory sick pay and certain means-tested benefits) are calculated based on earnings. Salary sacrifice reduces stated earnings and could, in theory, affect some benefit calculations. This is rarely significant in practice for most salary sacrifice arrangements but is worth considering for those close to benefit thresholds.
Step-by-Step: Setting Up Salary Sacrifice
- Check what your employer offers — ask HR or payroll what salary sacrifice arrangements are available. Not all employers offer every scheme. Pension sacrifice is the most common; EV and childcare schemes are increasingly popular.
- Calculate your saving — use the salary sacrifice calculator to work out the income tax and NI saving for each arrangement, and compare the net cost versus buying the benefit out of post-tax pay.
- Check the impact on your adjusted net income — if you are subject to the HICBC, the reduction in adjusted net income from salary sacrifice may reduce or eliminate the charge.
- Sign the variation to your contract — salary sacrifice requires a formal agreement with your employer, usually a letter or addendum to your employment contract. Keep a copy.
- Review annually — your circumstances change. Review salary sacrifice arrangements each year, particularly if your income changes significantly or you have a new child.