How does a salary sacrifice scheme work?

Your contract is varied to reduce your gross salary by a chosen amount, and the employer pays that amount into your pension (often with its NI saving added). The lower salary shows on your payslip; the full contribution shows in your pension.

Tax relief and salary sacrifice · Salary sacrifice

What is salary sacrifice, and how does it work?

What salary sacrifice is, how the tax and National Insurance work, and where pensions, cars and cycles fit.

2 min read · Last reviewed 23 Sept 2026

— In short

Salary sacrifice is an agreement between employee and employer to give up part of contractual salary in exchange for a non-cash benefit, most commonly a pension contribution. Because the sacrificed pay is never made to you, it is not counted as earnings for income tax or National Insurance, and the employer pays it into your pension instead. The same mechanism runs electric-car and cycle-to-work schemes, though pensions are the cleanest case.

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Salary sacrifice is an agreement between an employee and employer to give up part of contractual salary in return for a non-cash benefit. The pension version is the most common. It saves employee National Insurance as well as income tax. You take a lower salary, and the employer pays the difference into your pension.

How a scheme works

Your employment contract is varied so your gross salary is reduced by the amount you choose. Because that pay is never made to you, it is not counted as earnings for income tax or National Insurance. The employer pays the sacrificed amount — often plus its own National Insurance saving — into your pension as an employer contribution. Your payslip shows the lower salary; the pension shows the full contribution.

A simple example · basic-rate employee · 2026/27 · £100/month sacrificed

Salary given up (per year): £1,200.00
Income tax + employee NI saved (28%): £336.00
Fall in take-home: £864.00
Into the pension (before any employer NI top-up): £1,200.00

Pensions, cars and cycles

The same mechanism runs electric-car schemes, the cycle-to-work scheme and some other benefits. Pensions are the cleanest case, because the contribution is itself tax-favoured. For a car, a taxable benefit-in-kind usually offsets part of the saving; a cycle-to-work bike keeps its exemption. This guide — and our salary sacrifice pension calculator — covers the pension case.

HMRC EIM42750+ (salary sacrifice) and EIM44000+ (optional remuneration arrangements) ; ITEPA 2003 Part 3.

For the full picture of what a pension sacrifice saves, read salary sacrifice for pensions, explained.

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Common questions

What is salary sacrifice?: Salary sacrifice is an agreement to give up part of your contractual salary in exchange for a non-cash benefit, most commonly an employer pension contribution. The sacrificed pay is not taxed and carries no National Insurance.
How does a salary sacrifice scheme work?: Your contract is varied to reduce your gross salary by a chosen amount, and the employer pays that amount into your pension (often with its NI saving added). The lower salary shows on your payslip; the full contribution shows in your pension.

Sources

Based on HMRC’s Employment Income Manual (EIM42750+, EIM44000+) and ITEPA 2003.

For planning and illustration purposes only. Verify all inputs against source documents. This explainer does not constitute financial or tax advice.