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September 28, 2026
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Salary sacrifice allows employees to exchange part of their gross salary for non-cash benefits like pension contributions or electric car schemes. This reduces both income tax and National Insurance Contributions (NICs) for the employee and the employer, helping lower overall employment costs while boosting employee benefits.
With employment costs and National Insurance Contributions on the rise, many employers and company directors are reviewing ways to optimise payroll and minimise tax liabilities. One strategy gaining renewed attention is salary sacrifice – a tax-efficient arrangement that can benefit both businesses and their employees.
In simple terms, salary sacrifice is an agreement between an employer and employee where the employee gives up part of their gross salary in return for a non-cash benefit. These benefits could include pension contributions, electric car leasing, cycle-to-work schemes, technology loans, or even extra holiday entitlement. Because the sacrificed portion of the salary isn’t subject to income tax or NICs, both parties save money.
Under the 2025 National Insurance changes, Class 1 employer NICs increased to 15%, putting additional pressure on employers. Salary sacrifice can help offset this by lowering the gross salary used to calculate NICs.
For example, if an employee sacrifices £1,000 of salary into their pension:
Those savings can either be reinvested into the business or shared with the employee as an additional incentive.
For company directors, particularly those who pay themselves a mix of salary and dividends, salary sacrifice remains one of the most efficient ways to extract profits tax-efficiently while contributing to retirement savings.
Take a director earning £60,000 who sacrifices £6,000 into their pension. They would save approximately £1,320 in personal tax and NICs, while the business would save £900 in employer NICs. The full £6,000 contribution is paid gross into the pension, attracting corporation tax relief as well.
Even directors on lower salaries (for example, £12,570–£20,000) can benefit by redirecting part of their income into pension contributions, gaining tax efficiency without increasing personal NIC exposure.
From an employer’s perspective, salary sacrifice reduces total employment costs by lowering NIC liabilities. It also helps businesses enhance their employee benefits package without necessarily increasing salaries. This can be particularly appealing in competitive recruitment markets or when pay rises are difficult to sustain.
Additionally, benefits like electric car and cycle-to-work schemes support a company’s net-zero goals, improve employee wellbeing, and demonstrate social responsibility.
However, compliance is key. Employers must ensure the scheme does not reduce an employee’s pay below the National Minimum Wage and that all participants fully understand the impact on their take-home pay and other benefits. Regular reviews and clear documentation are essential to remain compliant with HMRC regulations.
While salary sacrifice offers clear tax savings, it’s not without trade-offs. Reducing gross salary can affect certain entitlements such as mortgage affordability, statutory maternity pay, bonuses, or overtime rates, which are often calculated on pre-sacrifice salary figures.
For example, an employee earning £35,000 who contributes £2,000 into their pension through salary sacrifice reduces their taxable income to £33,000. They save around £560 in tax and NICs, while their employer saves another £300 in NICs. The combined effect is mutually beneficial—but it’s vital to consider the potential impact on personal finances and borrowing.
Salary sacrifice has evolved beyond a simple tax-saving mechanism. Today, it plays an important role in financial wellbeing, workforce retention, and environmental strategy. By offering flexible, tax-efficient benefits, employers can attract and retain talent while simultaneously reducing costs.
However, salary sacrifice isn’t a one-size-fits-all solution. Each business and individual should assess whether it suits their specific financial situation, employment structure, and long-term goals.
Get in touch with Naail & Co for tailored advice on how salary sacrifice can work for your business or personal financial strategy.
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