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If you’re wondering how does salary sacrifice work, you’re not alone. This tax-efficient strategy allows you to exchange a portion of your salary for non-cash benefits, potentially lowering your taxable income. It’s a great hack to boost your tax efficiency and save money on taxes. Keep reading for the answers to these burning questions! 🔥
In this guide, we’ll cover:
So, how does salary sacrifice work? At its core, salary sacrifice is a scheme where you give up part of your salary in exchange for a non-cash benefit. This can be bigger pension contributions, a travel card, a work phone etc.
The 1 million dollar question. Who the heck would be up for this? Generally, higher earners benefit the most because it can be a tool to increase your take home pay.
But, how does salary sacrifice work to reduce your tax liability?
Basically, the salary sacrifice scheme replaces your cash salary with non-taxable – or tax relieved – income. An example could be that you sacrifice £1,600 of your salary for a bike through your employer’s salary sacrifice scheme.
Here’s an example. Imagine you have a £101,000 salary, and you exchange £1,600 of that on a bike.
| Tax rate (%) paid on bike | Cost to you | Gross salary (cash) | Taxable income 👀 | Tax-free income | |
| With salary sacrifice | 0% | £0 | £99,400 | £86,830 | £14,170 |
| Non-salary sacrifice benefit | 40% | £640 (tax deducted from salary) | £100,360 | £87,970 | £13,350 |
| Without any employee benefit | 40% + 20% | £1,600(bought after tax from take home pay) | £101,000 | £88,930 | £12,070 |
As you can see from the above table, your taxable income is highest when you buy a bike outside any scheme, whether that’s a benefit in kind or salary sacrifice. (We’ll come onto the difference between these things later.)
With salary sacrifice, you avoid being tipped into the 60% tax bracket which affects people who earn between £100,000 – £125,140. Instead, your £101,000 salary is made through a combination of cash and non-cash remuneration.
If you’re looking to reduce taxable income and get more from your salary, we’re here to help! Our expert accountants can guide you through salary sacrifice schemes and ensure you’re maximising your tax benefits. Let’s get saving!
Salary sacrifice schemes used to cover a wider range of tax-free benefits, including gym memberships, travelcards, and shopping vouchers. However, changes introduced by the government which cut back on the fun tax-efficiency, fearing that many employees and employers were sidestepping their tax liability via salary sacrifice.
Today, many company perks are now taxable. They’re still more tax-efficient than a cash salary, but you get a tax relief on them rather than them being non-taxable benefits. The tax is recorded and paid using a form called the P11D.
That said, some benefits remain non-taxable, including:
Contributing more to your pension via a salary sacrifice scheme is a good tactic to be tax efficient. But how does salary sacrifice work when it comes to pensions?
Well, your pension contributions are taken from your salary before tax is deducted, reducing your taxable income. In other words, your take home pay is higher.
If you’re a basic rate taypayer, you also get an automatic 20% tax relief on your contribution.
If you’re a higher or additional rate taxpayer, you can claim an additional 20% to 25% tax relief. But to claim this, it’s not automatic. Unfortunately, you’ll have to submit a self assessment. Fortunately, TaxScouts is a thing 😉.
HMRC will basically give you back the tax that you paid on the income that you used for your pension contribution.
In your case you earned £49,000 and contributed £1,000 to your pension.
You get £250
Your pension provider will automatically get this for you and add it to your pension pot.
Your pension pot will now be worth £1,250.
Does salary sacrifice reduce taxable income in a way that makes it worth it? The answer really depends on who you are. There are some salary sacrifice schemes that are beneficial outside the financial gain.
But if it’s financial gain you’re after – and who could blame you – salary sacrifice schemes can be a good way to reduce your tax liability.
Once you earn over £100k, you begin to lose your entitlement to the tax-free personal allowance, which can push your effective tax rate up to 60%. While this isn’t an official income tax rate, it happens because for every £2 you earn above £100k, you lose £1 of your personal allowance. This reduction means more of your income is taxed at higher rates.
The income tax rates in the 2025/26 tax year 👇
| Income | Tax rate | Tax band |
| Up to £12,570 | 0% | Personal allowance |
| £12,571 to £50,270 | 20% | Basic rate |
| £50,271 to £125,140 | 40% | Higher rate |
| over £125,141 | 45% | Additional rate |
So if you’ve just started earning £100k+ but you’re not yet an additional rate taxpayer, salary sacrifice is a good way to make your tax-free income stretch.
Here are some examples of both taxable and non-taxable benefits that you might be offered through your employer.
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