How a sacrifice works
HMRC defines it as an agreement to reduce an employee's entitlement to cash pay, usually in return for a non-cash benefit. It is a contract change the employee agrees to, not a deduction from pay already earned. Swapping freely between cash and the benefit removes the tax and NI advantage.
Most benefits taken this way are valued at the higher of the salary given up or the usual benefit-in-kind charge. A few keep their exemption: pension contributions and pension advice, workplace nurseries, cycle-to-work schemes, and childcare vouchers or directly contracted childcare that started before 4 October 2018.
Three limits matter. Cash pay cannot fall below National Minimum Wage rates. Lower pay can cut Statutory Maternity Pay or remove it if average weekly earnings fall under the lower earnings limit. And from 6 April 2029, pension contributions sacrificed above £2,000 a tax year will be treated as earnings for National Insurance, according to the policy paper published on 4 December 2025.
Sacrificing £150 a month into a pension
An employee on £3,000 a month, category A, tax code 1257L, sacrifices £150 a month and the employer pays it into their pension. Cash pay becomes £2,850.
| Who | Rate on the £150 | Saving |
|---|---|---|
| Employee, Income Tax | 20% | £30.00 |
| Employee, National Insurance | 8% | £12.00 |
| Employer, National Insurance | 15% | £22.50 |
The pension receives £150 while the employee's take-home falls by only £108. Some employers add part of their £22.50 saving to the pension as well.
How it looks on the payslip
Payroll shows it in one of two ways. Either basic pay is printed at the new contractual figure, £2,850, or the full £3,000 appears with a negative earnings line such as Pension salary sacrifice −£150.00 above the gross for tax and NI. Both are correct. What should not appear is the £150 in the deductions column, as that would look like a contribution taken from net pay with no tax or NI saving.
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Related terms
Questions
Does salary sacrifice reduce National Insurance?
Yes, for both sides, because NI is charged on the lower cash pay. From 6 April 2029, pension amounts sacrificed above £2,000 a year will attract employee and employer NI again.
Can salary sacrifice take pay below minimum wage?
No. HMRC says arrangements cannot reduce cash earnings below National Minimum Wage rates, and employers need a process to cap the sacrifice so the minimum is kept in every pay reference period.
Why is my gross pay lower after salary sacrifice?
Because your contract now pays less cash in return for the benefit. The lower figure is the pay that tax, National Insurance and often statutory pay are worked out on.
Sources
- HMRC: Salary sacrifice for employers (read 8 October 2026)
- HM Treasury and HMRC: Salary sacrifice reform for pension contributions (from 6 April 2029) (read 8 October 2026)
- HMRC: Rates and thresholds for employers 2026 to 2027 (read 8 October 2026)
Figures are for the 2026/27 tax year unless the text says otherwise. This page explains a payroll term; it is general information, not tax or legal advice.