Salary sacrifice: how reducing your pay could make you better off 

Nobody likes paying tax, but it’s an unavoidable fact of life. Unfortunately, the tax burden has increased for many people in recent years because of “fiscal drag”.  

This happens when Income Tax thresholds remain frozen, while average earnings increase. Consequently, more of your earnings could be pushed into the taxable range, meaning you pay more Income Tax. 

Fortunately, there are ways to potentially mitigate a large tax bill, including “salary sacrifice” – forgoing a portion of your salary in exchange for non-cash benefits from your employer. 

As such, you could potentially use salary sacrifice to reduce the tax you pay. 

You may be able to give up part of your salary in exchange for non-cash benefits 

When you use salary sacrifice, your employer reduces your salary in exchange for non-cash benefits instead. For example, employers might offer childcare, a car, a cycle to work scheme, a gym membership, or pension contributions. 

You must agree the salary sacrifice scheme with your employer and they will update your contract to reflect the additional benefits you are entitled to. 

Employers may be willing to do this because it reduces your salary, meaning that they don’t pay as much in National Insurance contributions (NICs), so they save money. 

Additionally, it could benefit you because, in certain circumstances, you might be able to increase your take-home pay by using salary sacrifice. 

Somebody earning £52,000 a year could be almost £500 better off by using salary sacrifice to pay pension contributions 

Normally, HMRC calculate your Income Tax and NICs on your total salary before pension contributions are taken. 

Yet, when you use salary sacrifice to pay your pension contributions, you reduce your salary by a certain amount, and that money is saved in your pension. HMRC then calculates your Income Tax and NI based on your reduced salary. 

In some cases, this might mean that your take-home pay increases, even though your salary is lower. 

For example, according to the Guardian, if you earned £35,000 a year and paid a 5% contribution – £1,750 – through a workplace pension scheme, you would take home £27,319 once Income Tax and NI were deducted. 

However, if you paid the same contribution through salary sacrifice, your salary would now be £33,250 (£35,000 minus the £1,750 pension contribution). As a result, you would pay less Income Tax and NI, and your take-home pay would be £27,459 – an increase of £140 a year. 

The gains could be even more significant if you are close to the edge of a tax threshold. For instance, if you earned £52,500 and contributed £2,300 to your pension through salary sacrifice, your new salary would be £50,200.  

As a result, your earnings now fall below the higher-rate tax threshold – £50,271 in 2024/25. This would mean your take-home pay increases from £39,167 to £39,664, making you almost £500 a year better off. 

Additionally, some employers may be willing to contribute the money that they save on NICs to your pension, giving you a valuable increase to your retirement savings. However, they are not obliged to contribute this money to your pension and you may need to discuss this with them first. 

Using salary sacrifice could limit your eligibility for credit or certain benefits 

Using salary sacrifice to make pension contributions could increase your take-home pay, but it isn’t always the most sensible option as there are potential downsides. 

Salary sacrifice could affect how much you can borrow 

Typically, when you take out a mortgage or any other type of credit, your eligibility is partly based on your salary. Consequently, if you use salary sacrifice and your earnings appear lower on paper, this could affect how much you can borrow. 

Salary-linked benefits from your employer could be affected 

Certain salary-linked benefits could be affected. For instance, if your employer offers a “death in service” benefit that pays a lump sum to your beneficiaries if you die, the amount that your family receives is normally a multiple of your salary. So, a lower salary could reduce the amount that your death in service benefit pays.  

You may not be entitled to certain state benefits 

Your entitlement to certain state benefits may change if you use salary sacrifice. For example, the amount of State Pension you receive is based on your NICs. Using salary sacrifice could reduce the NICs you pay and, as a result, may affect your State Pension. 

Other contribution linked benefits could also be affected including: 

  • Statutory Sick Pay (SSP) 
  • Statutory Maternity Pay (SMP) and Statutory Paternity Pay (SPP)  
  • Bereavement support payment 
  • Employment and Support Allowance. 

It may be beneficial to consider your financial goals and whether salary sacrifice could affect them. For example, if you plan to purchase a new home in the next few years, you might want to avoid using salary sacrifice to potentially maximise the amount you can borrow. 

However, if you don’t plan to borrow anything in the near future and want to focus on building your retirement savings, salary sacrifice might be a good option. 

Get in touch 

If you want to explore whether salary sacrifice could benefit you, get in touch or email us at for more information. 

Please note 

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. 

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change. 

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.  

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.   

Workplace pensions are regulated by The Pension Regulator. 

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. 

Posted in Financial Planning, Financial Services, Pensions.