How Does Salary Sacrifice Work? NI Savings, Tax Benefits & Pitfalls

Salary sacrifice (also called salary exchange) is a formal agreement to reduce your gross salary in exchange for your employer paying more into your pension. Because the sacrifice happens before tax and National Insurance are calculated, both you and your employer pay less NI.

The maths

Say you sacrifice an extra £1,000 into your pension:

• Income tax saved: £200 (basic rate)
• Employee NI saved: £80 (8%)
• Net cost to you: £720 for £1,000 in pension
• Employer NI saved: £150 (15% from April 2025)

Many employers pass their NI saving back into your pension, making it even better value.

Potential drawbacks

• Mortgage affordability: lenders use your reduced salary, which may lower borrowing capacity
• State benefits: some benefits are linked to earnings; sacrificing too much could affect entitlement
• Life assurance: if death-in-service is a multiple of salary, your reduced salary means a lower payout

Calculate your exact NI saving with our salary sacrifice calculator.