Salary sacrifice is an arrangement where an employee gives up part of their gross salary in exchange for a non-cash benefit, most commonly a larger pension contribution. The sacrificed amount is not taxed as income and is exempt from National Insurance.
In one line: Salary sacrifice swaps part of gross pay for a benefit such as a pension payment, cutting income tax and National Insurance.
How salary sacrifice works
Salary sacrifice is recognised by HMRC. Because the employee's contractual pay is reduced, the sacrificed sum escapes income tax and employee National Insurance, and the employer also saves National Insurance, which some pass into the pension.
For example, an employee sacrificing 2,000 GBP of salary into a pension avoids 20% income tax and 8% employee National Insurance on that amount in 2026-27 (HMRC), so 2,000 GBP reaches the pension at a take-home cost of around 1,440 GBP.
Reducing gross pay can affect mortgage assessments, statutory maternity pay and other earnings-linked entitlements, so the lower headline salary has wider effects.
Salary sacrifice vs ordinary pension contributions
An ordinary contribution is paid from after-tax pay and reclaims income tax relief, but employee National Insurance has already been charged on that income.
Salary sacrifice removes the contribution before tax and National Insurance apply, so it saves National Insurance as well. The pension outcome can be larger for the same cost.
Primary source: HMRC: Salary sacrifice for employers