Salary sacrifice (UK)
A UK arrangement where an employee gives up part of their gross salary in return for an employer-funded benefit — typically pension contributions, reducing both income tax and NI.
Salary sacrifice is a UK arrangement under which an employee contractually gives up part of their gross salary in exchange for an employer-provided benefit. The most common use case is pension: the employee gives up, say, £5,000 of gross salary, and the employer contributes the £5,000 directly to the employee's pension scheme. The £5,000 never appears as taxable income.
The advantage over a regular employee pension contribution is the employee saves National Insurance on the sacrificed amount (the employer also saves NI, which many employers split with the employee). For a basic-rate taxpayer the NI saving is 8% of the sacrificed amount; for a higher-rate taxpayer earning above the UEL the saving is 2% on the sacrificed amount.
Other salary-sacrifice arrangements include cycle-to-work schemes, electric-vehicle leases, and childcare vouchers (legacy). The UK calculator on this site does NOT yet model salary-sacrifice in v1; gross input is treated as taxable.
Calculator pages that use this term
See also
- PAYE (Pay As You Earn) — The UK system for collecting income tax + National Insurance directly from payroll each month.
- National Insurance (UK) — The UK's second payroll tax — funds the state pension, NHS, and unemployment benefits.
- Marginal tax rate — The percentage paid in tax on the next unit of income earned — distinct from the average effective rate.
- Gross pay — The total annual salary before any tax, social-insurance, or pension deductions are taken out.