What is salary sacrifice? Here’s what you need to know

At first glance, salary sacrifice certainly doesn’t sound like an employee benefit – it sounds more like a punishment! Why would someone want to give up a portion of their salary, even if it does mean getting something else in return?

We often get asked questions about salary sacrifice when we’re busy putting together employee benefits schemes for our clients – and we’re going to answer each of the most frequently-asked ones in this comprehensive guide.

Although the idea of salary sacrifice can seem a little odd at first, when you learn how it works and what benefits it can deliver, it starts to make a whole lot of sense.

What is salary sacrifice?

In essence, salary sacrifice is a type of employee benefit that involves an employee ‘sacrificing’ part of their salary before tax. In exchange, they can put the money they sacrificed towards a physical item or an investment, like a pension.

When an employee signs up to a salary sacrifice (or salary exchange) scheme, they’ll receive a slightly lower monthly salary – but they’ll still get something of equivalent value in return.

The net result? The employee is able to spend money on something they want anyway, and they’ll also pay less tax. Because their salary is lower, they’ll pay less income tax and their (and their employer’s) National Insurance contributions will be reduced, saving them a little extra cash.

Plus, salary sacrifice is a non-taxable benefit – and there’s no need for employees to claim tax relief from HMRC. For employees, taking advantage of salary sacrifice couldn’t be simpler.

How does salary sacrifice work?

It’s rare to find a legal, Government-approved way for both employees and employers to pay less tax, but that’s exactly what salary sacrifice is. Provided the scheme doesn’t take an employee’s pay below minimum wage, it can be used to grant employees a wide range of non-cash benefits – whether it’s a physical product (like a laptop or bike) or something like increased pension contributions.

As you’d expect, employees have to agree to participate in a salary sacrifice scheme – they can opt in or out based on their preferences. Once the scheme is set up, those who opt in will see their salary reduce (along with their taxes) each month – and the leftover money can be spent on whatever the employee chooses.

Well, almost. There are usually a few restrictions on what the salary sacrifice money can be used for, depending on the scheme you choose.

What are the employee benefits of salary sacrifice?

• Employees will see reduced National Insurance contributions due to their lower gross salary.
• Income tax will be reduced too, allowing employees to keep more of the money they earn.
• The non-cash benefits accessible through salary sacrifice schemes still have a monetary value – meaning the employee isn’t really losing out financially at all. They might have a lower gross salary, but they won’t feel any worse off.

What are the benefits of salary sacrifice for employers​?

• It’s not just the employee that benefits from a tax perspective – employers are able to reduce their National Insurance contributions too – which is a huge plus since the impactful increase in employer NI rates from April 2025.
• Salary sacrifice is a tax-free benefit, which is a rarity.
• Just like other employee benefits, signing up to a salary sacrifice scheme can be a useful recruitment tool for employers – and it can make it easier for them to hold on to their best employees, too.

Do employers have to offer salary sacrifice?

No, salary sacrifice isn’t mandatory – it’s an optional employee benefit that a growing number of employers are choosing to offer their teams.

According to 2025 research from Towergate, 48% of employers are currently using salary sacrifice. Smaller companies are less likely to offer it (38%), while large organisations with more than 250 employees are far more likely to offer it (67%).

What can salary sacrifice be used for?

Salary sacrifice schemes can be used to provide all kinds of different non-cash benefits for employees, including:

• Pension contributions: One of the most popular ways to benefit from salary sacrifice is to divert the money into a pension scheme. By using salary sacrifice in this way, employees can prepare for retirement more quickly while simultaneously reducing their tax burden – a win-win.
• Cycle-to-work schemes: To incentivise employees to cycle to work instead of taking the car, a cycle-to-work scheme can be set up. Employees can use the money to purchase a bike and any accessories they need to get started.
• Purchasing tech or equipment: If an employee needs new equipment (like a laptop, phone, tablet or camera), they can use a salary sacrifice scheme to get their hands on it, National Insurance-free.
• Company cars: Particularly beneficial for employees that spend a lot of time on the road, company car schemes make it easier to access a new car at a reduced cost. Typically, the company leases a vehicle on the employee’s behalf, which can then be replaced with a new one every three to five years. These need to be reported each year via P11D, so are a taxable benefit.

Are there any downsides to salary sacrifice schemes?

No employee benefit is completely free of downsides, and salary sacrifice has a few that are worth noting.

Mainly, these downsides are as a result of the employee’s gross salary reducing. For instance, a lower salary can make it harder for them to get approved for a loan or mortgage. It can also affect their access to any salary-based benefits too, like annual bonuses, overtime, redundancy pay, or statutory payments.

Although salary sacrifice does offer a few tax advantages, it can affect someone’s ability to access benefits like Child Benefit or Working Tax Credit. Plus, salary sacrifice schemes can’t usually be turned on or off at the flick of a switch; once an employee signs up, they’ll often be locked in for a set period of time, which can be challenging if their circumstances change midway through.

How can I implement a salary sacrifice scheme?

Interested in exploring the benefits of salary sacrifice in more detail and setting up a scheme of your own? With more than two decades of hands-on experience creating tailored employee benefits packages for businesses of all sizes, the team at Vero HR is here to help.

To get started, or to learn more, get in touch with our team today to schedule a free introductory call.