Everything You Need To Know About Salary Sacrifice

salary sacrifice - money on trees

Taking full advantage of salary sacrifice schemes is a fantastic way to accelerate your path to financial independence.

After all, it is one of the few legal options we have to minimize the amount of tax we pay and maximize our take-home earnings. 

The higher our take-home earnings, the more we can sock away in those tax-efficient investment vehicles and watch compound interest work its magic.

Sadly, while the underlying maths are simple (more on that below) many people don’t actually understand how salary sacrifice actually works. 

Hence, I decided to put together a little visual illustration of how using a salary sacrifice scheme leaves you with extra money in your bank account every single month.

Salary Sacrifice – A Case Study

Imagine you are looking to change jobs and have two job offers on the table.

Both pay £55k/year and offer a company car, a benefit with an estimated value of £5k.

However, employer A simply decides to add the £5k to your total income, bringing it to £60k. 

In contrast, Employer B offers the company car benefit through a salary sacrifice scheme.

Let’s now take a look at how the two job offers would in terms of take-home pay.

salary sacrifice illustration

With employer B, your taxable annual pay is lower.  Therefore, you end up saving £2k on your income tax bill as well as £100 on National Insurance contributions. 

There’s nothing complicated about it at all.   Employer B simply chose to use a salary sacrifice scheme to make the company car benefit non-taxable. 

Are There Limitations?

Sadly, yes. 

Back in 2017, the government decided to withdraw income tax relief on all but the following workplace benefit schemes:

  • Childcare
  • Cycle to work
  • Ultra-low emission cars
  • Pensions

However, while you will no longer receive the income tax benefits on any other schemes, you continue to receive NI savings on them.

And guess what?  Some employers actually choose to pass this saving on to their employees. 

Extending the example above, Employer B would save about £690/year in employer NI contributions by offering a salary sacrifice scheme. 

They could well choose to pass this saving on to you.

employer savings from salary sacrifice

However, the most important point to remember is that salary sacrifice has the biggest impact on your bottom line when it comes to pensions.

After all, given the mandatory enrolment in workplace pension schemes, chances are you will be making pension contributions for the majority of your working life.

And if there’s a sure-fire way to make that working life longer than you need to, it is to forgo all the tax and NI relief you are entitled to!

Therefore, it is definitely worth checking whether your employer operates a pension salary sacrifice scheme.  If so – you should consider signing up to one. 

If not, you can – and should – encourage your employer to put one in place.   This shouldn’t be a tough sell given the NI benefits would accrue to all parties.

Most importantly, if you are a higher-rate taxpayer and your employer does not operate a pension salary sacrifice scheme, you should make sure you are getting the right level of pension tax relief. 

Does Salary Sacrifice Come With A Catch? 

Not really.  The income tax and NI savings are yours to keep.  However, you should keep the following in mind: 

  • The fact that your gross pay is lower under a salary sacrifice scheme could affect your mortgage applications.  This is because maximum loan value is often based on a gross pay multiplier
  • Your parental or disability leave pay could also be affected
  • If you have a workplace benefit that is based on a multiplier or percentage of your gross pay (life or injury insurance is a common one), the absolute payout you could be entitled to could be lower
  • Finally, the fact that your NI contributions are lower may affect the level of some benefits in the future (i.e. Jobseeker’s Allowance)

That’s it!

Is it the most exciting topic in the world?  Sure isn’t. 

Are you ever going to become this guy by taking advantage of salary sacrifice?  Hell no – partly because it will never reduce your tax rate to zero

But use salary sacrifice wisely and you will come out far ahead of where you had started. 


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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.

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4 thoughts on “Everything You Need To Know About Salary Sacrifice”

  1. Great post! It helps simplify what can be quite a complex topic.

    Just a few quick queries.

    If someone was earning, for example £60K, is the optimum amount to sacrifice 16% (ie 10K, thus bringing the employee’s salary down from the higher rate tax band into the low rate tax band)?

    Also, my employer also contributes a max of 11% if I contribute 7%. How does this interact with the above?

    Finally, is there any calculator/tool available to help me work out the difference between the following two scenarios? Scenario 1: salary sacrifice of 7% (with employer match of 11%) and scenario 2: salary sacrifice of 16% (with employer contribution of the max11%)?

    Thanks so much for your content. Best out there!

    Note – I have a plan 1 student loan. Also, not currently aware if my employer passes on any NIC savings.

    1. Banker On FIRE

      Thanks John.

      There isn’t really an “optimum” amount at this level (though it might make sense when you make between 100k and 120k given the loss of personal allowance in that range).

      If you are earning above 50k, you are in a 40% tax bracket, so that’s the tax savings that will accrue to you on any amount contributed over 50k.

      If you are under 50k, the tax savings decline to 20% of the amount contributed.

      Here’s a calculator I like to use which will be handy in your situation: https://www.thesalarycalculator.co.uk/salary.php

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