What is salary sacrifice in the UK?

Salary sacrifice (also called salary exchange) is a contractual arrangement between employer and employee where you agree to reduce your gross salary in exchange for a non-cash benefit of equivalent value. Common salary sacrifice benefits include: additional employer pension contributions, a company car, childcare vouchers (legacy scheme), cycle-to-work equipment, and ultra-low emission vehicles.

The tax advantage is significant: because your gross salary is reduced before tax, you pay less income tax and employee National Insurance. Your employer also saves employer NI (13.8%) on the sacrificed amount, which they often pass on as an enhanced pension contribution. For a basic-rate taxpayer, salary sacrificing £100 into a pension costs only around £68 in take-home pay because of the tax savings.

Salary sacrifice does reduce your pensionable pay and statutory reference pay for things like SMP, SSP, and redundancy calculations. It also reduces your income for mortgage affordability checks. You should receive a written amendment to your employment contract confirming the arrangement.