Salary sacrifice schemes

Salary sacrifice is an agreement to give up part of your contractual pay in return for a benefit your employer provides, such as a bike, an electric car or a home electronics package. Because your salary is lower, you pay less Income Tax and less National Insurance on it. For a basic rate taxpayer in England the saving is 28p in every pound sacrificed (20 per cent tax plus 8 per cent NI). For a higher rate taxpayer it is 42p, because NI above £50,270 is only 2 per cent.

How the saving works

Under a normal arrangement you are paid your full salary, tax and NI are taken, and you buy things from what is left. Under salary sacrifice the contract is changed so that your cash salary is lower, and the employer provides the benefit instead. Tax and NI are then worked out on the lower salary.

Say you earn £35,000 in England and join a cycle to work scheme for a £1,200 bike, paid over 12 months. Your salary drops by £100 a month. The tax you no longer pay on that £100 is £20 and the NI is £8, so your take-home pay falls by about £72 rather than £100. Over the year the bike costs you about £864 from take-home pay.

Your top rate (England, Wales, NI)	Tax saved per £100	NI saved per £100	Net cost of £100 sacrificed
Basic rate	£20	£8	£72
Higher rate	£40	£2	£58
Additional rate	£45	£2	£53

In Scotland the tax saving uses Scottish rates, so it is £19, £20, £21, £42, £45 or £48 per £100 depending on your band. Employers save too, because employer NI is 15 per cent of pay above £5,000. Some pass part of that saving on to staff.

Schemes you are likely to see

Public sector employers commonly run these:

• cycle to work, covered in our cycle to work guide
• electric and low emission car leasing, see salary sacrifice car schemes
• home electronics or technology schemes
• some employers’ additional voluntary pension contributions, and in some sectors the main pension contribution

The tax treatment of each benefit differs. Cycle schemes and workplace pension contributions are designed to be tax-efficient. A car made available for private use is a taxable benefit in kind, so the saving depends on the car’s benefit in kind rate; low emission cars have low rates, which is why most schemes focus on electric cars. Gov.uk explains which benefits keep their advantages under salary sacrifice and which do not.

Pensions in public sector schemes

The NHS Pension Scheme, the Teachers’ Pension Scheme, the Local Government Pension Scheme and Civil Service alpha all take member contributions through a net pay arrangement. Your contribution is taken before Income Tax, so you get tax relief at your top rate automatically, but National Insurance is still charged on the full salary. These schemes do not normally offer salary sacrifice for the main contribution.

Some councils and other employers allow additional voluntary contributions through salary sacrifice, which can save NI as well as tax. Our guide to pension tax relief compares the different ways relief is given.

What a lower salary can affect

A sacrifice lowers your contractual pay, and some things are worked out from that figure:

• Statutory Maternity Pay and other family pay are based on average earnings in a set period, so a sacrifice then can lower them; check the rules on gov.uk if you plan to have a baby while in a scheme
• your pension, if the scheme uses the reduced salary as pensionable pay; public sector schemes often use the pre-sacrifice figure, but ask your pension team
• mortgage applications, where lenders may look at your post-sacrifice pay
• life cover or death in service benefits linked to salary
• whether you count as earning enough for some benefits or thresholds, such as State Pension credits through the Lower Earnings Limit
• your student loan repayments, which fall with your pay

Read the agreement and ask HR how your employer treats each of these before signing.

The minimum wage floor

A sacrifice cannot take your cash pay below the National Minimum Wage or National Living Wage. From 1 April 2026 the National Living Wage is £12.71 an hour for workers aged 21 and over. Employers have to check this before approving a scheme, so staff on band 2 or the bottom NJC spine points may be turned down or offered a smaller amount.

This is why some lower paid staff are refused a car scheme or limited to cheaper bikes. It also means a pay award can change what is allowed: if the minimum wage rises faster than your basic pay, payroll may have to reduce or pause a sacrifice.

Getting information on your scheme

Your employer’s benefits page or intranet usually lists the schemes, the provider and the dates you can join. The NHS staff benefits guide covers what NHS trusts commonly offer. To see the effect on your own pay, compare a payslip before and after joining: the gross pay line should show the sacrifice, and the tax and NI lines should both fall.

For questions about whether a scheme is right for you, speak to your employer’s HR or pensions team, or an independent financial adviser for anything involving your pension.