Salary sacrifice explained: pensions, electric cars and childcare

Salary sacrifice is a change to an employee’s contract: they agree to a lower salary, and the employer provides a benefit worth the same or more. When the benefit is tax-favoured, both sides save. It is common for pensions and electric cars, but the rules have tightened and another change is due in 2029.

How salary sacrifice works

• The employee’s contractual salary is reduced. It is not a deduction from pay; the employee is paid less.
• The employer uses the saving to provide a benefit, such as pension contributions or a car.
• Because salary is lower, the employee pays less Income Tax and employee National Insurance, and the employer pays less employer NI.

For it to work, the arrangement must be a genuine variation of the contract, agreed before the salary is earned, and the employee must not be able to swap back to cash freely.

Which benefits still give the full advantage

Since 6 April 2017, the optional remuneration arrangement rules tax most benefits provided through salary sacrifice on the higher of the salary given up and the normal taxable value of the benefit. That removed the advantage for things like gym membership or health screening. The rules do not apply to:

• employer contributions to registered pension schemes, and pension advice
• employer-supported childcare and workplace nurseries
• cycle to work schemes and cycling safety equipment
• cars with CO2 emissions of 75g/km or less, including electric cars

Pension salary sacrifice

Example

An employee earning £45,000 sacrifices £3,000 of salary into their pension in 2026/27.

Some employers add part or all of their NI saving to the employee’s pension. Higher rate taxpayers save 40% Income Tax and 2% NI on salary above £50,270.

The 2029 change

From 6 April 2029, salary-sacrificed pension contributions above £2,000 a year will be subject to employee and employer National Insurance at the normal rates. The first £2,000 keeps its NI advantage, and the Income Tax treatment does not change. In the example above, £1,000 of the £3,000 would attract NI from 2029/30.

Electric car salary sacrifice

Employees can lease an electric car through their employer in exchange for salary. The taxable benefit is the car’s list price × the appropriate percentage, only 4% in 2026/27, while the salary given up saves tax and NI at the employee’s full marginal rate.

For a higher rate taxpayer, a £500 a month sacrifice for an electric car with a £40,000 list price saves around £2,520 a year in tax and NI (42% of £6,000), while the benefit costs £640 in tax (40% of £1,600). Company car tax rates for electric cars rise to 5% in 2027/28, 7% in 2028/29 and 9% in 2029/30. See company car tax.

Limits and side effects

National Minimum Wage

Pay after the sacrifice must still be at least the National Minimum Wage for the hours worked. Employers must check this every pay period, especially for lower-paid staff. See National Minimum Wage 2026.

Effects on other entitlements

A lower contractual salary can reduce:

• statutory payments such as Statutory Maternity Pay, which depend on average earnings
• mortgage affordability assessments, unless lenders use the pre-sacrifice salary
• life cover or other benefits linked to salary, unless the employer uses a reference salary
• State Pension qualifying years, if pay falls below the Lower Earnings Limit (£6,708 a year in 2026/27)

Salary sacrifice can also bring adjusted net income below £100,000 or £60,000, which restores the Personal Allowance or reduces the High Income Child Benefit Charge. This is a common reason higher earners use it.

Setting up a scheme

Employers should:

1. decide which benefits to offer and confirm they are outside the optional remuneration rules if the full advantage is intended
2. document the arrangement as a variation of each employee’s contract
3. set the rules for opting in or out, usually once a year or on a life event such as a birth or house move
4. check minimum wage compliance for every participant
5. report the benefits correctly, through payroll or P11D

Frequently asked questions

Does salary sacrifice save National Insurance?

Yes, for both the employee and the employer, because NI is charged on the lower salary. From April 2029, pension sacrifices above £2,000 a year will attract NI.

Which salary sacrifice benefits are still tax-efficient?

Pension contributions, electric and ultra-low emission cars (75g/km or less), cycle to work schemes and employer-supported childcare.

Can salary sacrifice reduce my pay below the minimum wage?

No. Pay after sacrifice must be at least the National Minimum Wage for the hours you work.

Will salary sacrifice affect my maternity pay?

It can, because Statutory Maternity Pay is based on average earnings. Many employers adjust arrangements around maternity leave; check your scheme’s rules.