What is salary sacrifice, and when is it worth it?
An arrangement where you give up part of your contractual salary in exchange for a non-cash benefit — most commonly pension contributions — and the benefit comes from the fact that the sacrificed amount is never treated as earnings, so neither you nor your employer pays National Insurance on it.
How the saving works. A normal pension contribution saves income tax but not your National Insurance. Under salary sacrifice, the money never counts as salary, so:
You save income tax and employee National Insurance.
Your employer saves employer National Insurance, which is a substantial rate — and many employers pass some or all of that saving into your pension, which is the part that makes it genuinely attractive.
What it is commonly used for: pension contributions, electric vehicle schemes, cycle to work, childcare vouchers in legacy arrangements, and additional holiday purchase.
Why electric car schemes are so prominent, as an example: the benefit-in-kind rate for electric vehicles has been set very low, so sacrificing salary for a car produces an unusually favourable outcome compared with buying one from taxed income.
The consequences of a lower official salary, which is where the trade-offs sit:
Mortgage borrowing may be assessed on the reduced figure, though many lenders will consider the pre-sacrifice amount if evidenced.
Statutory payments — maternity pay, redundancy pay, sick pay — are frequently calculated on actual earnings, so a sacrifice can reduce them. Many employers therefore suspend sacrifice during maternity leave, and this should be checked.
State pension and benefit entitlement, if earnings fall below the relevant thresholds.
Life cover multiples based on salary.
You cannot sacrifice below the National Minimum Wage, which is an absolute limit.
When it is clearly worth it: where you are already contributing to a pension, are comfortably above minimum wage, and your employer shares its National Insurance saving.
When to think harder: around a mortgage application, when planning a family, or if earnings are close to a threshold.
General information, not financial advice.