March 7 2022

What is salary sacrifice and how does it stack up?

Salary sacrifice can bring financial benefits for employees, but there are also pitfalls to be aware of. Join us to find out what exactly salary sacrifice is and how it works. Arm yourself with the knowledge so that you can decide whether these schemes stack up for you financially. 

What is salary sacrifice?

A salary sacrifice scheme is when you agree with your employer that you’ll give up (sacrifice) some of your salary in return for a non-cash benefit. 

You might, for example, give up a portion of your salary to boost your pension or in return for another benefit. This could be a car, a bike or additional annual leave.

Salary sacrifice schemes can be a way to make tax and National Insurance savings. This is because, depending on the scheme, you may not have to pay tax or National Insurance on the portion of your pay you have sacrificed. 

However, this means your take-home pay will be lower, and this can have other impacts on your life. For instance, if you want to buy a house, then it could affect the size of the mortgage you can take out. 

Let’s explore how these schemes work and cover the advantages and disadvantages so you can decide whether they’re right for you.

How does salary sacrifice work?

Not every employer offers a salary sacrifice scheme. You need to check whether your employer has a scheme and, if so, what type of scheme they offer.

When you enter into a salary sacrifice scheme, you’ll sign an agreement with your employer. You’ll agree how much of your salary you will give up in return for a certain benefit. The payments you make will depend on your employer’s terms and the benefit offered.

Example salary sacrifice scheme

Say for example you receive a £3,000 bonus (lucky you!) Normally this would be subject to income tax and National Insurance. But, you decide to sacrifice the whole of your bonus and in return your employer pays it into your pension fund. 

Since your bonus is now invested in a pension fund, you don’t have to pay income tax or National Insurance on the money. This means you receive the entire amount. 

How will salary sacrifice appear on your payslip?

Your payslip will show a reduction in your gross pay. However, if it’s not clear what the deduction is for, then it’s worth talking to your Payroll or Human Resources team to check if your pay is correct.

What are the benefits of salary sacrifice schemes?

Some schemes save you tax and National Insurance. 

You don’t pay tax or National insurance on the following schemes:

  • Pensions
  • Bicycles
  • Some low-emission vehicles
  • Childcare provided by the employer
  • Specific intangible benefits like buying more annual leave
  • Outplacement services and retraining courses

All other salary sacrifice schemes are subject to National Insurance and tax. From 6th April 2022 this will include accommodation, company cars (except those above) and school fees. 

Salary sacrifice and pensions

Pensions are the most common salary sacrifice schemes. You agree to sacrifice a portion of your salary which your employer then pays into your workplace pension, along with the contribution they would normally make.

Since your salary is reduced, both you and your employer will pay less National Insurance. This means that your take-home pay may be higher. 

On top of this, your employer might pay some or part of the money they have saved into your pension to boost their contribution. But they don’t have to do this.

While a pension salary sacrifice scheme may sound like a no-brainer, there are some disadvantages to be aware of. 

What are the disadvantages of salary sacrifice?

Before going ahead, it’s important to weigh up the pros and cons based on your individual circumstances. For example, taking a lower salary could affect your other entitlements as an employee, such as:

Life insurance cover

If you’re receiving life insurance from your employer and the cover is calculated based on your salary, speak to your employer before entering into a salary sacrifice agreement. By reducing your salary, you may receive less life cover.

Other benefits linked to salary

Other benefits you receive from your employer may decrease with your salary such as sick pay, overtime pay, and redundancy payments. Bonuses and pension benefits may also be affected.

Pension contribution refunds

If you’re making salary sacrifice contributions into a defined benefit pension scheme, then it’s important to know where you stand if you leave the company you’re with. MoneyHelper’s pension salary sacrifice webpage is a good place to find detailed information to help you decide whether you’ll be better off agreeing to a pension salary sacrifice scheme.

Loan eligibility

Receiving a lower salary could affect your eligibility for any loans that take into account your income, such as a mortgage.

Access to state benefits

Your entitlement to state benefits such as statutory maternity pay (see below) and paternity pay may be affected. At the time of writing, you’re not legally allowed to enter into a salary sacrifice agreement if it will take your income below the national minimum wage.

Impact of salary sacrifice on maternity pay

Statutory Maternity Pay (SMP) is based on average earnings over a period of 8 weeks or more before the end of the qualifying week. Salary sacrifice payments reduce your salary which could adversely affect the amount of SNP you are entitled to claim. It’s best to check online through sites like or get professional advice if you need help. 

So, is salary sacrifice worth it?

Although salary sacrifice can provide benefits for employees, it may not be suitable for everyone. Ask your employer for information about how their scheme works and whether it will affect your pension and/or other benefits. Your employer can also calculate how salary sacrifice payments will impact your monthly earnings.

Once you understand the scheme your employer is offering, you can weigh up the information and decide whether it’s right for you.

Unlock payday with Openwage 

Managing our finances can be tricky. That’s why we built a solution that empowers employees to access their earnings before their usual payday. We call it on-demand pay.  

With on-demand pay, you have more control over your finances because you don’t have to wait until payday to get your salary. Learn more about Openwage

The information in this article is for general information only. It does not constitute professional advice from Openwage. Openwage is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information in this document relates to your unique circumstances.