Last reviewed: 30 April 2026 | Sources: HMRC — Salary sacrifice for employers | GOV.UK — Pensions and salary sacrifice | HMRC Employment Income Manual EIM42750
⚡ TL;DR — Skip to what matters
Salary sacrifice is an agreement between you and your employer to reduce your gross salary by an amount that your employer then contributes to your pension. Because your salary is lower, you pay less National Insurance — and so does your employer. For a basic-rate taxpayer earning £35,000 who sacrifices £3,000, the NI saving is £360 for the employee and £414 for the employer. The catch: a lower salary may affect mortgage assessments, statutory pay (maternity/paternity/sick pay) and certain state benefits.
📋 Key Facts at a Glance
- Employee NI saving: 8% of sacrificed amount (2026/27 rate — earnings between £12,570 and £50,270)
- Employer NI saving: 13.8% of sacrificed amount — employers sometimes pass this saving to employees as extra pension
- Income tax: basic-rate taxpayers save the same via salary sacrifice or relief-at-source — higher-rate taxpayers save more
- Salary floor: salary cannot be reduced below the National Minimum Wage (£12.21/hr for 25+ in 2026/27) via salary sacrifice
- Statutory pay impact: maternity pay, paternity pay, sick pay calculated on reduced salary — check before agreeing
- Mortgage impact: some lenders use gross salary after sacrifice — check with your lender
- State Pension: contributions record based on actual earnings — sacrifice slightly below NMW can reduce NI record
- Opt-out: you can generally change or cancel salary sacrifice arrangements — check your employer's notice period
- Source: HMRC — Salary sacrifice for employers | EIM42750 | GOV.UK pensions guidance
How salary sacrifice works mechanically
Under a salary sacrifice arrangement, you contractually agree to give up part of your salary. Your employer then makes an equivalent contribution directly to your pension on your behalf. Because the money never forms part of your taxable salary, neither you nor your employer pays National Insurance on it — and you don't pay income tax on it either.
Compare this with a standard employee pension contribution: you contribute from post-tax, post-NI salary, then claim tax relief (which HMRC adds to your pension). Under salary sacrifice, the money goes into your pension before tax or NI — making it more efficient for most people.
Calculating the savings
| Scenario | Standard pension contribution | Salary sacrifice |
|---|---|---|
| Gross salary | £35,000 | £32,000 (after £3,000 sacrifice) |
| Employee NI payable | Higher (on £35,000) | Lower (on £32,000) |
| Employee NI saving | — | ~£360 (8% of £3,000 + 2% if above £50,270) |
| Employer NI saving | — | ~£414 (13.8% of £3,000) |
| Amount into pension | £3,000 + tax relief | £3,000 (employer contribution) |
Many employers pass some or all of their NI saving back to employees as additional pension contributions. Check your employer's policy — this can add hundreds of pounds to your annual pension pot at no extra cost to you.
The National Minimum Wage floor
Your post-sacrifice salary cannot fall below the National Minimum Wage (NMW) — £12.21 per hour for workers aged 25+ in 2026/27. If your normal salary is close to the NMW, your employer legally cannot facilitate a salary sacrifice that would breach this floor. Part-time and lower-paid workers should check before agreeing to any sacrifice arrangement.
Impact on statutory pay
Several statutory payments are calculated based on your "normal weekly earnings" — which in a salary sacrifice arrangement is your reduced salary:
- Statutory Maternity Pay (SMP): calculated on reduced salary — sacrifice affects how much SMP you receive
- Statutory Paternity Pay (SPP): similarly affected
- Statutory Sick Pay (SSP): flat rate — generally unaffected by salary sacrifice
- Redundancy pay: calculated on weekly pay — may be lower if salary has been sacrificed
If you are planning to take maternity or paternity leave, consider whether to pause or reduce your salary sacrifice arrangement for the reference period used to calculate statutory pay.
Frequently asked questions
Do I save income tax as well as NI on salary sacrifice?
Yes — because the sacrificed amount never forms part of your taxable salary, you pay no income tax on it. A basic-rate taxpayer saves 20% income tax + 8% NI = 28% total. A higher-rate taxpayer saves 40% + 2% = 42% total on amounts between the basic and higher rate thresholds.
Can my employer refuse to offer salary sacrifice?
Yes — salary sacrifice is optional for employers. If your employer's scheme does not include salary sacrifice, you cannot set it up unilaterally. Ask your HR or payroll department whether your scheme operates on a salary sacrifice basis.
Will salary sacrifice affect my mortgage application?
It depends on the lender. Some lenders assess affordability based on your contracted (post-sacrifice) salary; others gross it back up to your pre-sacrifice salary. Always check with your mortgage lender or broker before changing your sacrifice arrangement if you are planning to apply for a mortgage.
Can I opt out of salary sacrifice?
Yes — salary sacrifice is a contractual arrangement that can be changed. Most employers allow you to opt out or change the level of sacrifice, though notice periods (typically one month) apply. Check your employer's scheme rules.
Does salary sacrifice affect my State Pension entitlement?
Generally not significantly. Your NI record is based on your post-sacrifice earnings. As long as your post-sacrifice salary remains above the Lower Earnings Limit (£6,396 in 2026/27), your NI record and State Pension accrual are unaffected. Only very high sacrifice amounts that bring salary close to or below the NMW create a risk.
Sources & References
- HMRC — Salary sacrifice for employers: gov.uk/guidance/salary-sacrifice-and-the-effects-on-pensions
- HMRC Employment Income Manual — EIM42750 (salary sacrifice: general guidance)
- GOV.UK — National Minimum Wage rates: gov.uk/national-minimum-wage-rates
- GOV.UK — Statutory Maternity Pay: gov.uk/maternity-pay-leave/pay
- MoneyHelper — Salary sacrifice for pension contributions: moneyhelper.org.uk
Disclaimer: For informational purposes only — not financial advice. Always verify at GOV.UK. More guides: our UK Finance hub.
