What if you could pay less tax and take home more money – without changing your salary? That’s the power of salary sacrifice. Think of the HMRC salary exchange initiative – also known as salary sacrifice – as a financial magic trick where everyone wins. You agree to swap some of your salary for benefits you want, and as a result the amount of tax you owe goes down.
Time strapped? Key takeaways from the blog:
- Salary sacrifice increases take-home pay: By reducing taxable salary in exchange for benefits like pensions or childcare.
- Multiple salary sacrifice options exist: While pension salary sacrifice is the most common, employees can also use it for workplace nursery fees, electric vehicles, cycle-to-work schemes, and technology purchases, depending on their employer’s offerings.
- Benefits for all taxpayers: Lower-rate taxpayers save more on NI, while higher-rate taxpayers can save more in tax. This makes salary sacrifice an attractive option for all employees, regardless of income level.
- Salary sacrifice schemes don’t usually negatively impact salary linked benefits or services: mortgage applications, life insurance, and redundancy pay are typically based on pre-sacrifice salary, ensuring employees don’t lose out.
- Service considerations: It’s up to your employer what salary sacrifice schemes they offer you, and how they make them available. The best employers offer support to employees that reduces risks and helps you optimise for your unique situation.
Let’s break down exactly how this works and why it might be one of the smartest financial decisions you can make.
Table of contents
What is salary sacrifice?
A salary sacrifice, or salary exchange, is a formal arrangement where you agree to reduce your contractual gross salary in exchange for non-cash benefits provided by your employer.
At Maji, we prefer to call it a salary exchange because your income isn’t lost – your taxable salary is simply reduced in exchange for access to valuable financial and personal benefits. This lowers your National Insurance (NI) obligations, and sometimes also the amount of income tax you owe.
How salary sacrifice works for the employee
Think of salary sacrifice as changing the order of operations for how you get paid.
The old way: You’re paid your full salary; the government takes tax and NI and then you use what’s left to pay for benefits like your pension contributions.
The salary exchange way: You pay for your benefits first by a deduction from your salary. Then you get paid, less the benefits. Finally you are taxed on what’s left.
The win? You end up with the same salary and the same benefits, but you pay less tax which means your take-home pay increases.
Let’s break it down with a working example
Let’s look at an example considering a pension salary sacrifice arrangement.
If you have a £40,000 total salary, and opt into a salary exchange, you will be taxed differently, meaning you take home more pay than someone not in a salary exchange.
Let’s assume an NI rate of 15% (as per the budget announcement in 2024), and standard pension contributions of 8% apply (5% for the employee and 3% for the employer).
To summarise:
- You receive the full amount of your chosen contribution into your pension
- You save on NI contributions
- You take home more pay per month, with added benefits
Considerations for lower rate taxpayers
If you’re a lower-rate taxpayer, salary sacrifice can offer great benefits:
- For tax-exempt benefits, you can save 20% tax and 8% National Insurance (NI).
- For non-exempt benefits, you can save 8% NI.
However, there are some important points to consider to make sure salary sacrifice is actually working in your favour:
- Don’t fall below the Lower Earnings Limit: If salary sacrifice reduces your earnings below £6,396 a year (or £123 a week), you may lose access to important statutory benefits such as:
- State Pension qualifying years
- Statutory Sick Pay
- Maternity, Paternity or Shared Parental Pay
- Be mindful of tax relief: If you earn less than or equal to the Personal Allowance (currently £12,570), you don’t pay income tax – but with a relief-at-source pension, the government still adds basic rate tax relief to your contributions. Switching to salary sacrifice puts you into a net pay pension arrangement, which doesn’t include that government top-up. In this case, salary sacrifice might not be the best option for you financially.
- If you think salary sacrifice isn’t suitable: If you’re not eligible for salary sacrifice, because it would lower your income below minimum thresholds, your employer might offer alternative benefits instead, such as shopping discounts, cashback schemes, or other money-saving perks. These can still support your financial wellbeing in a meaningful way.
Considerations for higher rate taxpayers
If you’re a higher-rate taxpayer, salary sacrifice becomes an even more powerful tool:
- For tax-exempt schemes, you can save 40% tax and 2% National Insurance (NI).
- For non-exempt schemes, you can save 2% NI.
You can also use salary sacrifice to reduce your marginal rate of tax. This is especially useful if:
- You earn between £100,000 and £125,140, where your effective tax rate equals 60% due to the tapering of your Personal Allowance. By using a salary sacrifice scheme, you may be able to swap your salary – being taxed at 60% – for a benefit such as pension contributions where you might pay a tax rate of 0%. If you’re due a bonus, consider sacrificing it directly into your pension. You won’t pay income tax or NI on it, meaning more of it goes towards your future.
The advantages of salary sacrifice
There are several reasons to access benefits through a salary sacrifice scheme. These include:
- Higher take-home pay – You pay less tax and/or NI, increasing the amount you take home each month.
- Tax optimisation – Salary sacrifice can reduce your taxable income, potentially moving you into a lower tax band so you can reduce your marginal rate of tax to the lowest possible level.
- Maintaining eligibility for benefits – Lowering your taxable income can help you stay eligible for means-tested benefits such as Tax-Free Childcare and Child Benefit.
- Cost-effective employee benefits – Opting into salary sacrifice schemes enable you to access valuable benefits, like pension contributions or childcare support, in a more tax-efficient way.
Understanding the different types of salary sacrifice
While pension salary sacrifice is the most common scheme made available by employers, it isn’t just designed with pensions in mind. Choosing the right salary sacrifice scheme depends on your personal lifestyle and needs.
Before exploring the different types of salary sacrifice schemes, it’s important to note that employers may offer different options.
Here is a breakdown of some of the key salary sacrifice schemes offered by Maji:
- Pension contributions
- Workplace nurseries
- Cycle to work
- Electric car scheme
- Home and Technology
What’s taxed and not taxed?
Salary sacrifice schemes fall into two categories: exempt and non-exempt.
Exempt schemes:
These benefits are not subject to tax or National Insurance (NI) contributions. These include:
- Employer pension contributions
- Workplace nursery fees
- Cycle-to-work schemes
- Payroll giving
Non-exempt (taxable) schemes:
These benefits are considered ‘Benefits in kind’, effectively a non cash benefit that counts as taxable income. Therefore they are subject to income tax paid by you at your normal rate. However, you are exempt from paying NI on these benefits. Examples include:
- Technology schemes
- Car maintenance
- Travel and leisure
- Travel card
Special exemptions: Leasing an electric car is effectively exempt because the government has set the tax rate at 3% (2025/2026 tax year). However, this is set to increase slowly over the next few years to 9% in 2030.
Busting the salary sacrifice myths
There are quite a few myths surrounding salary exchange schemes, most of them around how you can use them and the benefits you get. Here are some of the most common:
Myth 1: It means less money.
Actually, this isn’t true. You pay less tax and/or NI so you end up taking home more money.
Myth 2: It’s only for high-rate taxpayers.
Actually, the only limitation comes if you earn less than the Lower Earnings Limit or if your chosen contributions bring your salary below the National Minimum Wage.
Myth 3: It will affect my mortgage applications.
Most mortgage providers know about salary sacrifice and will base their calculations on your take home pay, which is now higher thanks to salary sacrifice, or on your pre-sacrifice salary which can be proven with a letter if you need it.
Myth 4: It’s too complicated.
Actually, it’s very easy for you to join a scheme, especially if your employer works with a third-party like Maji. The admin responsibilities fall mostly on your employer, making it as easy for you to join as just opting in.
Myth 5: Salary sacrifice reduces my benefits, like life insurance or critical illness cover
In most cases, benefits such as life insurance and critical illness cover remain linked to your notional (pre-sacrifice) salary, not your reduced post-sacrifice salary. However, it’s always best to check with your employer to confirm. At Maji, all our partner employers ensure that benefits remain based on your pre-exchange salary, so you don’t lose out.
Eligibility and statutory impact
In order to participate in a salary sacrifice scheme, you must meet the eligibility requirements set out by HMRC and your employer. Even if you’re part-time or on a fixed-term contract, you can still benefit from salary sacrifice.
Some of the most important considerations are:
- Your earnings can’t fall below the National Minimum Wage (NMW) after the salary sacrifice, and it’s your employers responsibility to ensure that this is managed appropriately on your behalf.
- Shared parental/maternity pay/parental bereavement pay/adoption pay can be affected by a salary sacrifice scheme. You can get a detailed look at these guidelines here.
- Redundancy pay can also be impacted as the amount you receive is a ratio dependent on age and average weekly pay in the 12 weeks prior to receiving notice.
- Statutory benefits like sick pay, parental leave, and pension credits (applicable to those over State Pension age with low incomes) are only available if you earn above the Lower Earnings Limit, which is £6,396 per year (or £123 per week). If salary sacrifice reduces your earnings below this threshold, you may lose access to these entitlements.
The most popular questions answered
Salary sacrifice can sometimes be a bit complex, with certain aspects often misunderstood or seeming overwhelming. To help clarify things, we’ve compiled the most common questions we receive from employees and detailed the facts for you.
1. How do I know if I have salary sacrifice on my pension?
To find out if you have salary sacrifice on your pension, check a payslip or speak with your payroll department.
If your employer is running a salary sacrifice scheme, you should see two tell tale signs:
- On payroll, for the pension, your employer should be contributing the full pension amount. So if you pay 5% and your employer pays 3%, you should see the employer contribution totalling 8%
- On a payslip, the employee pension contribution or other salary sacrifice benefit should appear as a pre tax dedication rather than a post tax payment
Your HR or payroll team should be able to confirm if you’re enrolled in a salary sacrifice pension scheme and explain the specific details.
- Does salary sacrifice affect my mortgage application?
The short answer is almost always no. Most lenders will assess mortgage applications by conducting an affordability assessment. These vary as to whether they take gross pay (before deductions and tax), net pay (after deductions and tax) or take-home pay. If an affordability assessment is done on gross pay, salary sacrifice wont make any difference. If done on take-home pay, a salary sacrifice can boost numbers so may positively affect the outcome of an affordability assessment.
As salary sacrifice is such a common way for people to take benefits, most lenders are aware of this and do not count it against an application.
If there is a lender that does count it and/or works on the net pay salary, there are simple ways around it such as the employer writing a letter on behalf of the employee to the mortgage company to explain the gross salary position, or the employee just opting out of the salary sacrifice scheme (depending on the terms and conditions of the scheme).
- Can I opt in and out of salary sacrifice at any time?
In most cases, yes—salary sacrifice is voluntary, and you’re not locked in forever. But how flexible it is depends on the type of benefit you’re using:
- For benefits like pension contributions, where there’s no upfront cost to your employer, you can often opt in or out at any time.
- For benefits with an upfront cost to your employer, such as electric car leasing, there’s often a minimum term (like 12 months). That’s because your employer commits to a longer-term financial agreement on your behalf.
Every time you join or leave a salary sacrifice scheme, your employment contract has to be updated to reflect the change in your pay and benefits – so expect to sign a revised agreement each time.
If you’re unsure, it’s always worth asking your employer about the specific rules for the benefit you’re interested in.
- What happens to a salary sacrifice arrangement if I leave the company?
If you leave your job, your salary sacrifice arrangement will usually end on your last working day. That means any benefits you’ve been receiving through salary sacrifice, like extra pension contributions or other non-cash perks, will also stop, unless your contract says otherwise.
If your benefit involves something with a longer commitment, like an electric car lease, there might still be costs to cover after you leave. Depending on the scheme, you may need to transfer the lease to another employer, settle the remaining payments yourself or return the benefit (if allowed).
Before signing up for a long-term benefit through salary sacrifice, it’s a good idea to check what would happen if you left the company early.
Your final payslip should reflect the end of your salary sacrifice, and your employer will handle any necessary adjustments to make sure everything is in line with HMRC rules.
What you should look for in a salary sacrifice offer from your employer
Not all salary sacrifice schemes are created equal. If your employer is offering (or considering offering) salary sacrifice benefits, it’s worth understanding what makes a scheme truly valuable for you as an employee.
Here’s what to look for:
- A choice of high quality schemes that suits your needs – Salary sacrifice schemes should be offered by best in class providers who have your best interests at heart. You will want a range of schemes that match your priorities, whether it’s childcare support, an electric car lease, boosting your pension, or tech purchases.
- Clear information and controls to reduce your risk – You should expect:
- Help to ensure you don’t go under the Lower Earnings Threshold
- NMW compliance
- Information about what happens if you make use of salary exchange, then leave employment
- Clear rules around opt in/opt out for each scheme
- Access to customer support – you will want easy access to customer support to clarify questions and get help. Look for live chat and/or slack integrations as the ideal scenario.
- Personalised guidance and coaching – Everyone’s financial situation is unique. Whether you’re a higher-rate taxpayer or have a lower income, great employers offer personalised support so you can work out how to make the best decisions for your context, and get general help to optimise your finances. After all, whilst salary sacrifice can help make your money go further, financial coaching can make an even bigger difference as it’s been shown to help employees be £295,000 better off by retirement!
- Simple, low-hassle processes – The scheme should be easy to use with minimal admin. Your HR team ensures everything is straightforward and your contract reflects any changes.
- Pension support that makes a real difference – Pension salary sacrifice is valuable, but the best employers provide tools and coaching to help you save more for the future. This support can make a big impact on your long-term financial wellbeing.
- Support for everyone, no matter their earnings – There might be times when you aren’t able to utilise salary sacrifice due to constraints such as NMW controls. You’ll want to make sure your employer has other financial benefits in place to support you.
How to help your employer find a good salary sacrifice provider
Salary sacrifice schemes can be a powerful way to enhance your financial wellbeing, offering savings on tax, National Insurance, and access to valuable benefits. By understanding how these schemes work and ensuring you have the right support, you can make informed decisions that align with your financial goals.
Whether it’s pension contributions, childcare support, or other benefits, a well-structured salary sacrifice scheme can provide long-term advantages.
Maji’s platform makes implementing and managing salary sacrifice schemes simple and impactful for your employer. Our solution includes:
- Pre-vetted, trusted providers – We’ve done the research for you. Our platform gives you access to carefully selected, high-quality salary sacrifice schemes, saving you time and ensuring compliance
- Expert employer support – A dedicated account manager guides you through setup and ongoing management, providing specialist salary sacrifice expertise and live chat support whenever you need it
- Employee support services – Employees can access a dedicated chat service to ask questions and receive clear, timely answers, helping them understand and maximise their benefits
- Financial wellbeing tools and insights – Maji’s platform provides best in class tools and digital guidance to help employees understand their salary sacrifice schemes, run personalised calculations, and feel confident and in control of their money
- Employees have one place to access all their benefits – Employees can view and manage their salary sacrifice benefits in one place, ensuring a seamless and engaging experience
- 1-1 financial coaching – Our financial coaches are qualified financial advisors, providing employees with personalised practical support on the financial topics that matter to them, including tax optimisation, pension savings strategies, and how to make the most of their salary sacrifice savings, including investment options and pension consolidation guidance
- Quick implementation – Maji’s technology ensures a smooth, hassle-free setup, so you can start reaping the benefits of salary sacrifice in no time
Here’s how you can get salary sacrifice for your employer:
- Share helpful resources: Direct your employer to our guide on salary sacrifice to help them understand how it works: What is Salary Sacrifice? How Does It Work?
- Earn rewards: If your employer signs up with Maji, you could receive up to £500! Learn more here: Maji Individual Rewards
