In short, by taking part in a salary sacrifice scheme the cost will be deducted from your salary before tax. You will no longer pay income tax or NIC on the gross salary you give up. If you are participating in a salary sacrifice car scheme, you will pay tax on the value of the benefit (Benefit in Kind).
While “giving up” salary might sound counterintuitive, the primary motivation is almost always tax efficiency. By reducing your contractual pay, you reduce the gross salary upon which your taxes are calculated.
Breakdown
To understand the tax impact, you first have to look at how the HM Revenue & Customs (HMRC) views your income. Usually, you are taxed on your “gross” earnings. If you earn £40,000, you pay Income Tax and National Insurance (NI) on that £40,000.
Under a salary sacrifice arrangement, you formally change your contract. If you sacrifice £400 per month for a car contribution, your new official gross salary becomes £35,200. Because your “official” pay is lower:
- Income Tax is calculated on the lower amount.
- National Insurance Contributions (NICs) are calculated on the lower amount.
How does salary sacrifice affect national insurance?
Most tax-relief methods only save you Income Tax. However, because salary sacrifice technically lowers your salary rather than just making a deduction from it, you avoid paying NICs on the sacrificed portion.
- For Basic Rate Taxpayers: You typically save 8% in NI on the amount sacrificed.
- For Higher Rate Taxpayers: You typically save 2% in NI on the amount sacrificed (above the Upper Earnings Limit).
Furthermore, employers also save on Class 1 NICs.
What are common salary sacrifice schemes?
Not all benefits qualify for these tax perks. Since 2017, the government has restricted the “tax-free” status of salary sacrifice to specific areas to prevent people from sacrificing salary for things like white goods or wine. The “Big Five” remaining benefits are:
| Benefit | Tax Treatment |
| Pension Contributions | No Income Tax, No NI (Note: A £2,000 cap on NI-free contributions applies from April 2029). |
| Electric Vehicles (EVs) | No Income Tax or NI on the sacrifice, but you pay a small “Benefit-in-Kind” (BiK) tax (3% in 2025/26). |
| Cycle to Work | No Income Tax, No NI on the cost of the bike/equipment. |
| Childcare Vouchers | Only for those who joined schemes before Oct 2018. No Income Tax or NI up to limits. |
| Workplace Training | Tax-free if the training is related to your current or future role in the company. |
Note on EVs: While you pay a small Benefit-in-Kind tax, it is often significantly cheaper than paying for a car out of your post-tax (net) income, as the lease, insurance, and maintenance are all paid from your “pre-tax” gross salary.
What is Benefit In Kind?
Benefit in Kind (BiK) refers to non-cash perks or fringe benefits provided by employers to employees, which have a monetary value but are not included in salary, such as company cars, private medical insurance, or gym memberships. These benefits are typically taxable, with values reported to HMRC.
Will my tax code change on salary sacrifice schemes?
In short, yes. If we look at car salary sacrifice as an example, after the car has been delivered you will need to inform HMRC that you have been provided with a company car. HMRC will then arrange for your tax code to be changed so that the income tax can be deducted from your monthly pay.
As soon as HMRC confirms your revised tax code to your employer the income tax due on the company car can be collected. As this may take several weeks you should note that the first collection may include more than one month’s company car tax.
If I participate in a salary sacrifice scheme will it affect any other payments or benefits made by the Company?
Most businesses will use the term “Reference Salary” to mean your original salary before taking account of any salary sacrifice adjustment and the term “Revised Salary” to refer to your salary after the sacrifice.
Your participation in the Scheme should not affect any other salary-related earnings as all future pay rises, salary related pay and benefits provided by your employer, including bonuses, commissions, overtime and shift premium, should continue to be based on your “Reference Salary”.
Our experts understand the ins and outs of a salary sacrifice scheme, if you are looking for more information on how this can affect you contact the team or look at the gov.uk site for more information related to you.
