What are salary sacrifice examples?

Salary sacrifice is a formal arrangement where an employee agrees to give up a portion of their agreed-upon gross salary in exchange for an agreed non-cash benefit provided by their employer. ^[1][3][6] This reduction in cash remuneration is made before calculating tax and National Insurance (NI) contributions, meaning the employee's taxable income drops. ^[4][9] For this arrangement to be valid, the agreement to sacrifice the salary must generally be established before the salary is earned. ^[5][8] The primary driver for both employer and employee participation is the potential for tax and NI savings, as the sacrificed amount avoids both income tax and the associated employee NI contributions. ^[1][6]

# Core Mechanics

At its foundation, salary sacrifice modifies the employment contract, even if temporarily. ^[8] When an employee opts into a scheme, their gross pay is reduced by the value of the benefit they receive. ^[9] For example, if an employee earns £40,000 and sacrifices £2,000 for a benefit, their new gross salary for tax purposes becomes £38,000. ^[7] The employer then uses the sacrificed cash amount to purchase the benefit on the employee’s behalf. ^[4][9]

The benefit to the employer stems from reduced National Insurance contributions, as the employer’s NI liability is calculated on the lower gross payroll figure. ^[1][4][6] However, the employee’s savings are usually more significant because they avoid both income tax and employee NI on the sacrificed amount. ^[1][6] It is critical to understand that because this involves a change to gross pay, it can affect other statutory payments, which are often calculated based on average earnings. ^[3]

# Pension Contributions

The most traditional and widely adopted example of salary sacrifice involves pension contributions. ^[4][5] In the UK context, if an employee agrees to sacrifice salary for pension contributions, the employer contributes that sacrificed amount directly into the employee’s pension scheme. ^[4][9] This is favorable because employer pension contributions are typically not subject to income tax or NI, meaning the full sacrificed amount goes into the pension pot, providing the maximum tax relief. ^[4][7]

In Australia, a similar arrangement is referred to as salary sacrificing into superannuation. ^[5] The core concept remains the same: paying into the retirement fund via pre-tax income rather than post-tax income. ^[5] While this offers significant upfront tax benefits, there is a consideration regarding lower earnings thresholds. For instance, in some jurisdictions, if the salary sacrifice arrangement pushes the employee’s adjusted earnings too low, it could potentially affect their entitlement to certain state benefits, such as the State Pension, as contributions may fall below required thresholds for qualifying years. ^[4]

How does UK salary sacrifice work?

# Lifestyle Perks

Beyond pensions, numerous workplace benefits are commonly offered through salary sacrifice, often aimed at improving work-life balance or providing access to items that might otherwise be too expensive. ^[2][6]

# Cycle Schemes

The Cycle to Work scheme is a very common UK example. ^[1][6][8] Employees can sacrifice salary to effectively lease a bicycle and safety equipment from their employer. ^[6] Since the cost is paid before tax, the employee secures a discount equivalent to their marginal tax rate plus NI rate on the equipment’s cost. ^[2]

# Childcare Costs

Childcare vouchers or workplace nursery places have historically been popular sacrifice options. ^[1][6][8] By sacrificing salary to pay for registered childcare, employees can significantly reduce their tax liability, especially if they are in higher tax brackets. ^[2] This mechanism effectively allows essential spending to be covered by pre-tax income.

# Retail Discounts

Some modern schemes allow employees to sacrifice salary for gift cards, retail vouchers, or discounted leisure activities. ^[2] This functions similarly to other schemes—the salary is reduced, and the employee receives the monetary equivalent in vouchers, saving tax on that value. ^[2]

When evaluating a lifestyle benefit scheme managed by an external provider, it is worthwhile to compare the total monthly commitment shown on the salary sacrifice platform against the direct retail cost for the equivalent item or service. Occasionally, administrative fees or insurance markups built into the provider's offering can slightly erode the gross saving, especially on lower-value items. ^[2][6]

# Company Vehicles

Motor vehicle benefits have become a notable area for salary sacrifice, particularly with the rise of environmentally friendly options. ^[2][5][7]

# Low Emission Vehicles

Electric Vehicles (EVs) and Ultra-Low Emission Vehicles (ULEVs) are increasingly popular under these arrangements, especially in the UK. ^[2][7] When an employee sacrifices salary for a company car, the employer purchases or leases the vehicle, and the employee covers the cost through reduced gross pay. ^[7] The tax advantages here can be substantial, as the Benefit-in-Kind (BIK) tax rate for zero-emission vehicles is often much lower than for traditional petrol or diesel cars, creating a dual saving: tax relief on the sacrificed salary and lower BIK tax on the vehicle itself. ^[2]

# Novated Leases

In contexts like Australia, salary sacrificing can be used for novated leases. ^[5] This involves a three-way agreement between the employee, the employer, and a finance company. The employer agrees to pay the lease rental, running costs, and finance payments from the employee's pre-tax salary. ^[5] This is often used for company cars, similar in principle to the EV scheme but structured under local finance laws. ^[5]

How does salary sacrifice show on a payslip?

# Important Tax Contexts

While the savings are clear, a few nuances must be clearly understood before entering into any arrangement. ^[3]

# Statutory Pay Impacts

A crucial factor to assess is how salary reduction affects statutory entitlements. ^[3] Payments such as Statutory Maternity Pay (SMP), Statutory Sick Pay (SSP), and redundancy pay are often calculated based on an employee's Average Weekly Earnings (AWE) taken over a specific period preceding the qualifying event. ^[3] If an employee enters a salary sacrifice scheme shortly before maternity leave or a prolonged illness, the reduction in gross pay could inadvertently lower their AWE calculation, resulting in lower statutory payments than they might otherwise have received. ^[3] Therefore, when evaluating a scheme, employees should calculate their statutory minimum pay baseline before joining, especially if planning major life events soon, to ensure the sacrifice doesn't inadvertently drop them below a critical earnings threshold for other state or company benefits. ^[3]

# Agreement Timing

Another non-negotiable administrative point is the timing of the agreement. ^[5][8] Salary sacrifice is fundamentally a change to the terms of employment for future work. ^[8] An employer cannot legally reduce an employee’s salary for hours already worked or salary already earned in a given pay period and then apply that reduction toward a benefit. ^[5] The election must be made before the service (the work) that earns the salary is completed. ^[5][8]

# Scheme Management

The process relies heavily on the administrative capacity of the employer or their chosen third-party administrator. ^[6] The employer takes on the responsibility of deducting the correct amount of gross salary and correctly remitting the payment for the benefit to the provider. ^[6] This administrative overhead is why employers often partner with specialist benefits platforms. ^[2][6]

For schemes involving leased goods, like vehicles or high-value bicycles, the employer is usually the legal owner of the asset during the agreement term. ^[2][7] This relationship is what allows the tax structuring to work, as the employer is entering the primary lease or purchase contract. ^[7] If the employee leaves the job before the term is up, the contract often needs to be settled, which can result in early termination fees passed back to the employee. ^[2] This inherent contractual rigidity means employees should be certain about their long-term employment plans before committing to multi-year sacrifice agreements for physical assets. ^[2]