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Salary Sacrifice Explained – A Smart Way to Cut Tax in 2025

Payroll

Salary Sacrifice Explained – A Smart Way to Cut Tax in 2025

Salary sacrifice might sound like a pay cut, but for many UK employees and business owners, it’s a clever strategy to save tax and boost long-term benefits. In this blog, we break down how it works, which perks qualify, and what to watch out for in 2025—especially with frozen thresholds and rising costs.

What Is Salary Sacrifice?

Salary sacrifice is an agreement where you, the employee, give up part of your gross salary in exchange for a non-cash benefit from your employer. Because your gross salary goes down, so does the amount of Income Tax and National Insurance you pay.

And here’s the win-win: your employer pays less National Insurance too—so it’s often in their interest to offer it.

How It Works: A Simple Example

Let’s say your salary is £40,000. You agree to “sacrifice” £3,000, which your employer uses to pay into your pension instead. So:

  • Before:
    • Salary: £40,000
    • Taxable pay: £40,000
  • After salary sacrifice:
    • Salary: £37,000
    • Employer pension contribution: £3,000
    • Taxable pay: £37,000

You’re now paying tax and NI on £37,000 instead of £40,000—saving money without reducing your total reward.

What’s Included in a Salary Sacrifice Scheme?

As of July 2025, popular tax-efficient benefits include:

  • Pension Contributions: Still the most common use of salary sacrifice. The employer pays straight into your pension pot, which grows tax-free.
  • Electric Car Schemes: You lease a low-emission or electric vehicle through your employer. These attract low Benefit-in-Kind (BiK) tax—just 2% for 2025/26 on most EVs.
  • Cycle to Work Scheme: Spread the cost of a bike and gear over 12+ months and save tax at source.
  • Childcare Vouchers: Closed to new applicants since 2018, but existing users can still benefit under legacy rules.
  • Training & Education: If it’s work-related and approved, the employer can fund it tax-efficiently via salary sacrifice.
  • Other Optional Benefits: Additional annual leave, technology & gadgets (e.g. laptops), health & wellbeing packages, workplace parking.

The Financial Upside

For EmployeesLower Income Tax and NI—especially valuable now with personal tax thresholds frozen until April 2028.
Pension contributions grow from gross income, increasing long-term savings.
For EmployersReduced Employer National Insurance (13.8% on most earnings above £9,100 pa).
Option to reinvest the savings into employee benefits or retain the margin.

Watch Outs – Salary Sacrifice Isn’t Always Ideal

There are a few things you’ll want to check first:

1. Minimum Wage Rules

Your salary after the sacrifice mustn’t fall below the National Minimum Wage, which for 2025 is:

  • £11.64/hour (age 21+)
  • £8.60/hour (18–20)

Employers must check this before approving any arrangement.

2. Statutory Pay Risks

Benefits like maternity/paternity pay, sick pay, and redundancy are usually based on post-sacrifice pay. Sacrificing too much might reduce these entitlements.

3. Mortgage Applications

Lenders base affordability on actual salary, not total reward package. So, salary sacrifice might lower your borrowing power unless you explain it properly.

4. Pension Contribution Limits

Be aware of your Annual Allowance—£60,000 for 2025/26. Contributions over this could trigger extra tax unless you carry forward unused allowance from previous years.

Is Salary Sacrifice Right for You?

If you’re earning above the £12,570 personal allowance, salary sacrifice can be an easy way to reduce your tax bill and boost pension contributions or access benefits like an EV. But it’s not a one-size-fits-all solution.

A few golden rules:

  • It works best when you’re not near the minimum wage.
  • It’s a no-brainer if you’re maximising pension growth.
  • Employers should clearly document any changes in employment contracts.
  • Consider the long-term trade-offs—especially for future borrowing or benefits.

Quick Recap – 2025 Key Rates to Know

Item2025/26 Rate
Personal Allowance£12,570
Basic Rate Income Tax20% (up to £50,270)
Employee NI (main rate)8% (on earnings over £12,570)
Employer NI13.8% (on earnings over £9,100)
Electric Car BiK Tax2%
Annual Pension Allowance£60,000
Dividend Allowance£500
National Minimum Wage (21+)£11.64/hour

With frozen tax thresholds and growing living costs, salary sacrifice offers a genuine opportunity to take home more while investing in your future. Whether it’s building your pension, leasing an EV, or taking on extra training, structuring your pay package wisely makes a real difference.

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