Salary sacrifice schemes allow UK employees to give up part of their gross salary in exchange for non-cash benefits, often resulting in tax and National Insurance savings. While not suitable for everyone, these schemes can offer significant value if structured properly. This article looks at the main types of salary sacrifice arrangements available in the UK, including pensions, cars, and childcare vouchers.
What is Salary Sacrifice?
Salary sacrifice (also known as salary exchange) is a formal agreement between an employee and their employer to reduce the employee’s gross salary in exchange for a benefit. Because the sacrificed amount is taken before tax and National Insurance Contributions (NICs), it can lead to financial advantages for both parties.
1. Pension Salary Sacrifice
This is one of the most common and tax-efficient salary sacrifice schemes in the UK. Instead of the employee making contributions to a pension from their net pay, they agree to reduce their salary, and the employer pays the equivalent amount into their pension fund.
Benefits:
- Lower income tax and NICs for the employee.
- Employers also save on NICs and may choose to pass some of these savings back to the employee’s pension.
Important: Salary sacrifice should not reduce an employee’s earnings below the National Minimum Wage.
2. Car Salary Sacrifice Schemes
These schemes allow employees to lease a car through their employer in exchange for a reduction in salary. Typically, these are used to access low-emission or electric vehicles, which benefit from lower Benefit-in-Kind (BiK) tax rates.
What’s included:
- Monthly lease payments.
- Insurance, maintenance, and breakdown cover.
Pros:
- Access to a new, fully maintained car with minimal upfront cost.
- Lower BiK tax on electric or ultra-low-emission vehicles.
Note: High-emission vehicles offer fewer tax advantages and may not be included in some schemes.
3. Childcare Vouchers (Closed to New Entrants)
The childcare voucher scheme allowed employees to sacrifice part of their salary to pay for childcare, up to a tax-free limit. However, the scheme closed to new applicants in October 2018. Those already enrolled and who remain with the same employer can continue to benefit.
Limits (at closure):
- Basic rate taxpayers: up to £243 per month tax-free.
- Higher rate taxpayers: up to £124 per month.
New employees looking for childcare support must use the Tax-Free Childcare system, where the government contributes up to £2,000 per child per year (or £4,000 for disabled children).
Other Common Salary Sacrifice Schemes
- Cycle to Work: Exchange salary for a bike and equipment, saving on tax and NICs while promoting health and sustainable travel.
- Technology or Mobile Devices: Some employers offer salary sacrifice for laptops, tablets, or smartphones.
- Additional Annual Leave: Employees can ‘buy’ extra holiday days through salary deduction schemes.
Things to Consider Before Entering a Salary Sacrifice Scheme
- It may reduce your entitlement to benefits based on gross income (e.g., statutory maternity pay, mortgage borrowing).
- Salary sacrifice must not take you below minimum wage.
- Schemes must be set up correctly by the employer to meet HMRC regulations.
Related Questions
Is salary sacrifice worth it?
Yes, it can be tax-efficient and financially beneficial, especially for pension and low-emission vehicle schemes—but always check how it affects your take-home pay and entitlements.
Can anyone use salary sacrifice?
It depends on your salary level and employer policy. Those close to minimum wage or in short-term roles may not be eligible.
Can salary sacrifice affect my mortgage application?
Yes. Since salary sacrifice reduces your official gross income, it may impact the amount you can borrow for a mortgage or loan.