Salary Sacrifice Calculator

How a salary sacrifice arrangement works

Salary sacrifice is a change to your employment contract. You agree to a lower cash salary, and in exchange your employer provides a non-cash benefit, most often an extra employer pension contribution of the same amount. Because your contractual pay is lower, both income tax and National Insurance are calculated on the reduced figure.

HMRC sets the ground rules. The change to your contract is meant to last: HMRC says that if you can swap between cash and the benefit whenever you like, the tax and NI advantages do not apply, although schemes can let you opt in or out after a lifestyle change such as marriage, divorce, redundancy or pregnancy. The arrangement must not reduce your cash earnings below the National Minimum Wage. And because your pay is lower, statutory payments based on earnings, such as Statutory Maternity Pay, can fall or stop if average earnings drop below the Lower Earnings Limit of £129 a week.

Basic-rate and higher-rate examples compared

The saving comes from NI. Income tax relief is the same whether you use salary sacrifice or relief at source, but only sacrifice removes NI. A basic-rate taxpayer saves 8% employee NI on each pound sacrificed, and a higher-rate taxpayer saves 2%. These examples assume a 5% pension contribution, outside Scotland.

What else can be offered through salary sacrifice

Since April 2017, most benefits provided through salary sacrifice are taxed on the higher of the cash given up and the normal taxable value, which removes the tax saving. HMRC lists the exceptions that keep their tax advantages:

• Pension contributions and employer-arranged pension advice.
• Workplace nursery places, and childcare vouchers for employees who joined a scheme before October 2018.
• Bicycles and cycling safety equipment, including cycle-to-work schemes.
• Cars with CO2 emissions of no more than 75g/km, which are valued under the normal company car rules rather than the cash given up. This is how most electric car schemes work.

Side effects to check before you sign

A lower contractual salary saves tax but can also change other things linked to your pay.

• Student loan: repayments are based on your reduced pay, so they fall. On £35,000 with a Plan 2 loan, sacrificing £1,750 cuts repayments by about £158 a year.
• Child Benefit charge and the £100,000 taper: sacrifice lowers adjusted net income, which can reduce or remove both.
• Statutory pay: Statutory Maternity, Paternity and Sick Pay are based on actual earnings, so they can fall.
• Death-in-service and income protection: some schemes base cover on reduced pay unless the employer uses a notional salary. Ask.
• Mortgage applications: lenders may look at your reduced salary. Have your contract or HR letter to hand to show your pre-sacrifice salary.

What changes from April 2029

From April 2029, the amount of pension salary sacrifice that is free of NI will be capped at £2,000 a year per employee. Budget 2025 says employee and employer NI will be charged in the usual way on the amount above £2,000, and that employees sacrificing up to £2,000 keep the full benefit. For a basic-rate taxpayer sacrificing £5,000 a year, the extra £3,000 above the cap would cost about £240 in employee NI and £450 in employer NI at today's rates.

Until then the current rules apply in full. If you are planning a large one-off sacrifice of a bonus, doing it before April 2029 keeps the full NI saving.