Salary sacrifice is an arrangement where you agree with your employer to give up a portion of your gross salary in return for a non-cash benefit, most commonly a pension contribution, an electric car under an EV scheme, or a Cycle to Work bike. Because the sacrifice happens before income tax and National Insurance are calculated, it can save 28% to 47% on the sacrificed amount depending on your tax band, plus the employer saves 15% employer NI. For 2026/27, EV salary sacrifice is the most efficient single benefit available, with the 4% Benefit-in-Kind rate plus full income tax and NI relief on the lease cost. This calculator runs the maths on pension, EV and Cycle to Work sacrifices and shows the net cost to you and the cost to the employer.
How salary sacrifice works mechanically
A normal pension contribution from net pay flows like this: gross salary → income tax → NI → take-home → contribution → pension. A salary sacrifice contribution flows like this: gross salary → sacrifice → reduced gross salary → income tax (on the smaller number) → NI (on the smaller number) → take-home → no further contribution needed (the employer has paid into the pension instead).
The two effects are:
- Income tax saving: at your marginal rate (20%, 40%, 45%, or 19% to 48% in Scotland).
- Employee NI saving: 8% or 2% depending on whether you’re below or above the upper earnings limit.
The employer also saves employer NI (15%) on the sacrificed amount. Some employers pass this into the pension; some keep it; some split it. Salary sacrifice arrangements that don’t pass on the employer NI saving still benefit you because they reduce your own income tax and NI, but the gold-standard schemes share the employer NI saving with you.
EV salary sacrifice in 2026/27
Electric car salary sacrifice is currently the most tax-efficient benefit in the UK. The mechanism: the employer leases an EV and lets the employee use it as a company car, with the lease cost recovered through salary sacrifice. The employee pays Benefit-in-Kind (BiK) tax on the company car at 4% of list price for 2026/27 (rising 1% per year, hitting 9% by 2029/30). Compared to the same employee buying or leasing the car privately from net income, the savings stack up:
- The lease cost comes off gross salary, so saves income tax + employee NI at marginal rates.
- The employer saves employer NI on the sacrificed amount.
- The BiK on the EV is much lower than on petrol or diesel cars (4% vs 30%+).
- VAT on the lease can often be partially reclaimed by the employer.
For a higher-rate taxpayer leasing a £40,000 EV at £500 per month, the gross sacrifice is £6,000 a year. Income tax saved: £2,400. Employee NI saved: £120. BiK on a £40,000 EV at 4%: £1,600 added to taxable income, costing £640 of income tax. Net annual cost to the employee: £6,000 − £2,400 − £120 + £640 = £4,120, against a private lease cost of £6,000. About £1,880 a year saved.
Pension salary sacrifice and the 2029 NI cap
Pension salary sacrifice is currently uncapped for NI purposes , every pound sacrificed avoids 8% (or 2%) employee NI and 15% employer NI. From April 2029, the government has legislated that only the first £2,000 of pension salary sacrifice per year will be exempt from NI; sacrifice above £2,000 will pay NI as if it were salary. This is a four-year gap to plan around, but it’s not yet 2029, and 2026/27 contributions retain full NI relief.
For a basic-rate taxpayer making a £5,000 annual pension contribution via salary sacrifice in 2026/27: £1,000 income tax saved, £400 employee NI saved, £750 employer NI saved (which the best schemes pass into the pot). Net cost to employee: £3,600. Compare to the same £5,000 contribution as relief-at-source: £4,000 net cost (after claiming higher-rate relief, if applicable; basic-rate relief is automatic).
Cycle to Work and other smaller schemes
Cycle to Work is a salary sacrifice for a bike (and often equipment) up to £1,000 (uncapped at some employers operating consumer credit licences). The mechanic is the same: gross salary reduced, income tax and NI saved on the sacrificed amount. A basic-rate taxpayer sacrificing £1,000 saves £200 of income tax + £80 of NI = £280, making the bike effectively cost £720. A higher-rate taxpayer saves more.
Other less common salary sacrifice schemes include workplace nursery, mobile phone (limited rules), and ultra-low-emission vehicles other than EVs. Healthcare cash plans and gym memberships have been ineligible since 2017’s Optional Remuneration Arrangements (OpRA) reform, which limited tax relief on most non-pension, non-pension-related, non-childcare and non-low-emission-car sacrifices.
When salary sacrifice doesn’t pay
Salary sacrifice reduces your gross salary on paper. This affects:
- Mortgage applications: lenders look at gross salary or the post-sacrifice “reference salary” depending on the lender. Some lenders will add back salary sacrifice contributions; others won’t. Check before sacrificing aggressively if a mortgage application is on the horizon.
- Statutory payments: maternity pay, sick pay and redundancy pay are calculated on post-sacrifice salary, which can reduce them. Most employers contractually use pre-sacrifice salary for SMP/SSP, but this needs to be confirmed.
- Life cover and pension death benefits: typically a multiple of “reference salary” , confirm whether this is pre or post-sacrifice.
- Income below the National Minimum Wage: salary sacrifice cannot reduce pay below NMW, so low earners may not qualify.
Key takeaways
- Salary sacrifice saves income tax, employee NI and (for the employer) employer NI on the sacrificed amount.
- EV salary sacrifice is the most tax-efficient single benefit available in 2026/27, with a 4% BiK rate.
- Pension salary sacrifice is currently uncapped for NI relief; from April 2029 only the first £2,000 will avoid NI.
- Cycle to Work, workplace nursery and ULEVs other than EVs are also eligible salary sacrifice schemes.
- Salary sacrifice can affect mortgage applications, statutory pay and other reference-salary calculations , check before sacrificing aggressively.
Frequently asked questions
Does my employer have to offer salary sacrifice? No. It’s an optional benefit. Many employers offer pension salary sacrifice but not EV sacrifice; some offer EV but not Cycle to Work. Some smaller employers don’t offer any. You can ask, but the employer doesn’t have to agree.
How does salary sacrifice affect my pension contribution limit? Salary sacrifice contributions count towards the £60,000 annual allowance just like any other employer or personal contribution. They don’t get a higher limit. Carry-forward of unused allowance from previous years can extend the cap if you have headroom.
Will the 2029 pension NI cap affect contributions I make now? No. Contributions made in 2026/27, 2027/28 and 2028/29 retain full NI relief regardless of size. The cap only applies to contributions made in tax years from April 2029 onwards.
Can I salary sacrifice into an ISA? No. ISAs are funded from net pay and don’t qualify as salary sacrifice. The same is true of LISAs and most other personal savings vehicles. Salary sacrifice is restricted to specific employer-provided benefits , pensions, EVs, cycles and a small handful of others.