Salary sacrifice has become one of the most effective and legal ways for UK employees to reduce their tax and National Insurance (NI) bills. From April 2025, with rising income tax thresholds and the continued impact of fiscal drag, more people are unknowingly overpaying tax — simply because they are not using salary sacrifice efficiently.
What many employees do not realise is that a single payroll adjustment can reduce their taxable income, lower their National Insurance contributions, and even increase their take-home pay while still saving or investing for the future. For higher earners, the combined tax and NI savings can reach up to 42% — all without changing employer, working extra hours, or earning more.
What Is Salary Sacrifice?
Salary sacrifice is an arrangement between an employer and employee where the employee agrees to give up part of their gross salary in exchange for a non-cash benefit. Because the benefit is taken before tax and NI are calculated, both the employee and employer pay less.
Common salary sacrifice schemes include:
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Pension contributions (most popular and tax-efficient)
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Electric vehicles (EV leasing)
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Cycle to Work schemes
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Childcare vouchers / Tax-Free Childcare (older schemes)
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Additional annual leave
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Mobile phones or technology schemes (selected employers)
Why 2025 Makes Salary Sacrifice Even More Relevant
From April 2025:
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The personal allowance remains frozen at £12,570.
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The higher-rate tax threshold stays at £50,270.
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More middle-income earners will drift into the 40% tax bracket due to pay increases (fiscal drag).
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National Insurance contribution rates remain at 8% for basic-rate earners and 2% for higher-rate earners.
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High earners between £100,000 and £125,140 lose their personal allowance, resulting in an effective 60% tax rate on this band of income.
Salary sacrifice helps employees reduce their adjusted taxable income and reclaim allowances that would otherwise be lost.
How Salary Sacrifice Saves Tax and NI
| Scenario | Without Salary Sacrifice | With Salary Sacrifice |
|---|---|---|
| Gross Salary | £60,000 | £55,000 + £5,000 Pension Sacrifice |
| Income Tax (20%/40%) | Higher | Lower |
| National Insurance | Higher | Lower |
| Net Take-Home Pay | Lower | Higher (despite contributing more to pension) |
Why it works:
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Pension contributions via salary sacrifice are not taxed.
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You also avoid NI, unlike ordinary pension contributions.
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If income falls below thresholds, you could avoid:
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Child Benefit Tax Charge (over £50,000)
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60% tax rate (over £100,000)
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Reduction in Personal Allowance
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Example 1: Basic-Rate Taxpayer
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Salary: £45,000
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Pension via salary sacrifice: £3,000 per year (£250 per month)
Savings:
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Tax saved: 20% of £3,000 = £600
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Employee NI saved: 8% of £3,000 = £240
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Total saving: £840 per year
Example 2: Higher-Rate Taxpayer (£70,000 Salary)
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Pension sacrifice: £10,000
Savings:
| Type | Rate | Saving |
|---|---|---|
| Income Tax | 40% | £4,000 |
| NI | 2% | £200 |
| Total Saving | — | £4,200 |
So, a £10,000 pension investment only reduces take-home pay by £5,800.
Example 3: The 60% Tax Trap
For individuals earning between £100,000 and £125,140, every £1 earned over £100,000 loses £0.50 of personal allowance.
Effective tax rate = 60%.
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Salary: £110,000
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Pension sacrifice: £10,000
Result:
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Adjusted salary = £100,000
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Full personal allowance restored
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Income tax saved: 60% of £10,000 = £6,000
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NI saved: 2% = £200
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Total saving: £6,200
Which Benefits Qualify Under Salary Sacrifice in 2025?
| Benefit | Tax & NI Saving? | Notes |
|---|---|---|
| Pension Contributions | ✅ Yes | Most efficient |
| Electric Cars (ULEVs) | ✅ Yes | 2% Benefit-in-Kind rate in 2025 |
| Cycle to Work | ✅ Yes | Up to £1,000 tax-free |
| Childcare Vouchers (pre-2018) | ✅ Yes | Closed to new applicants |
| Mobile, Tech, Gym | ⚠️ Depends on HMRC rules | |
| Cash in return | ❌ No | Not allowed |
Impact on Payslip, Mortgage & Benefits
Positive:
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Higher pension pot
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Lower taxable income
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Lower student loan repayments
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Possible retention of Child Benefit or Personal Allowance
Considerations:
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Lower gross salary shown on payslip
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Could slightly reduce mortgage borrowing capacity (if lender uses gross salary rather than net income)
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Cannot reduce salary below National Minimum Wage
Employer Benefits
Employers also pay less National Insurance — currently 13.8%.
Example:
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Employee sacrifices £5,000
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Employer NI saved: £690
Some employers even reinvest this saving into the employee’s pension.
How to Set Up Salary Sacrifice in 2025
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Speak to HR or payroll department
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Choose the benefit (usually pension)
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Sign salary sacrifice agreement
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New reduced gross salary appears on your payslip
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Tax and NI savings are automatic
If advice is needed, a tax specialist like My Tax Accountant can assist in structuring salary sacrifice correctly for tax efficiency without affecting compliance.
Frequently Asked Questions (FAQs)
1. Is salary sacrifice legal?
Yes — it is fully HMRC-approved, provided it is structured correctly, documented, and does not reduce income below the minimum wage.
2. Can I stop or change my salary sacrifice?
Yes. Most schemes allow cancellation or adjustment with notice, especially for pensions or life changes like maternity or redundancy.
3. Does it affect mortgages?
Sometimes. A reduced gross salary may slightly reduce borrowing capacity, but many lenders look at net income and affordability, not just gross salary.
4. Is it better than making pension contributions directly?
Yes — because direct contributions only save tax. Salary sacrifice saves both tax and NI, making it more efficient.
5. Can directors of limited companies use salary sacrifice?
Yes. It is commonly used for directors’ pensions and electric company car schemes.
Final Thought
With income thresholds frozen and tax burdens rising in 2025, many UK employees are paying far more tax and NI than necessary. Salary sacrifice remains one of the simplest, HMRC-compliant strategies to legally reduce these costs — often boosting pension savings, preserving allowances, and improving long-term wealth.
A small adjustment to one payslip can deliver savings of up to 42%, especially for higher earners. And to benefit within the current tax year, employees should act before the end of the 2024/25 deadline in April.
