On a basic level, the term 'salary sacrifice’ is a very literal description of the process. By entering a salary sacrifice agreement with your employer (sometimes known as a ‘salary exchange’), you are volunteering to ‘sacrifice’ a portion of your income to purchase benefits from your employer.

But why would you willingly give up some of your hard-earned pay, and how could this possibly benefit you?

The short answer is that by sacrificing some of your salary, or contractual bonus, you stand to pay less income tax and national insurance. With a salary sacrifice agreement in place, it’s possible to ‘earn’ less but still actually take home more pay each month, on top of whatever benefits you might receive.

How does Salary Sacrifice Work?

A typical salary sacrifice agreement would involve you making an agreement with your employer whereby you are paid a lower gross salary in order to receive a non-cash benefit from your employer. This could include pension contributions, childcare vouchers or other benefits such as bicycle purchase as part of a cycle-to-work scheme.

Using pension contributions as an example, the employee could agree to a reduction in your gross salary that is equal to their pension contribution. In exchange, the employer then agrees to pay the total pension contributions. So, any contributions paid to the pension scheme will be treated as employer only.

There isn’t a maximum amount you can sacrifice however it is important to understand all the areas your decision will affect, such as:

• How much of your salary you can sacrifice depends on your current contractual agreement with your employer
• Different employers might set different limits – and you cannot reduce your gross pay so much that your earnings fall below the national minimum wage
• It may affect some of your other earnings related benefits that your employer offers, such as life cover and income protection insurance
• Ensuring your annual pension annual allowance is not exceeded

How does this benefit me?

The short answer is that by sacrificing some of your salary, you stand to pay less income tax and national insurance. With a salary sacrifice agreement in place, it’s possible to ‘earn’ less but still actually take home more pay each month, on top of whatever benefits you might receive.

Working the exact details of this out can be a bit tricky but below is an example of how it could be used to save you money:

• Ben earns £30,000 per year. He pays 3% of his salary (£900) into his workplace pension every year and his employer contributes 5% (£1,500)
• With Salary Sacrifice, Ben reduces his salary by £900 to £29,100 per year. This £900 is now paid into his pension by the employer on top of their usual £1500 per year contribution – so his total contribution level remains the same
• Because Ben’s salary is now £29,100 he now pays less national insurance than he did before
• He now pays just £1,321 in national insurance in the 2024/25 tax year, £72 less than without Salary Sacrifice
• Meanwhile, his pension contributions have remained the same
• Crucially, despite sacrificing some of his salary, Ben’s take-home pay has actually gone up by £72 because he is paying less tax

The table below breaks this down in more detail:

Sounds good! But why would my employer set up a salary sacrifice arrangement?

Simply put, it could save them money too. Employers pay national insurance contributions based on the salary of their employees. By reducing your salary, your employer will less national insurance each month. Not all employers run salary sacrifice schemes, and the specifics of each scheme vary but generally speaking, many employers are happy to set up a salary sacrifice arrangement as it can benefit their bottom line too.

If you think you might benefit from a Salary Sacrifice scheme, check with your employer to see if it’s something they can support you with.