What salary sacrifice is
Who this guide is for: For employees considering a pension salary-exchange election, and for employers modelling NI savings.
Salary sacrifice (sometimes called salary exchange) is an agreement where you give up part of your gross salary in return for a non-cash benefit — most commonly employer pension contributions.
Because the benefit is funded from gross pay you have agreed to forgo, you do not pay Income Tax or employee National Insurance on that portion. Your employer may also save employer Class 1 NI. Compare methods in Pension Tax Relief Explained.
How it differs from net pay and relief at source
| Aspect | Salary sacrifice | Net pay | Relief at source |
|---|---|---|---|
| Where contribution is taken | From gross via lower salary | From gross before tax | From net pay; provider adds basic-rate relief |
| Taxable pay falls? | Yes | Yes | No (tax relief via provider / claim) |
| Employee NI falls? | Usually yes (qualifying) | No | No |
| Employer NI falls? | Usually yes (qualifying) | No | No |
Effects to weigh carefully
Sacrifice can change figures that other systems use. Northline does not claim every lender or employer treats these the same way.
- Mortgage or affordability assessments — some use post-sacrifice cash salary.
- Statutory pay (for example maternity or sick pay) — calculations may use average earnings definitions that exclude sacrificed amounts.
- Life cover and salary-linked benefits — check whether cover is based on pre- or post-sacrifice salary.
- Overtime and bonus formulas — contractual definitions vary.
- Redundancy calculations — may reference contractual pay.
- Contribution-based benefits — earnings tests can differ from taxable pay.
- Student loan repayments — lower NI-able pay can change repayments in a period.
- National Minimum Wage — cash pay that counts for NMW must stay at or above the legal minimum.
Worked example
£45,000 with £2,400.00 pension via salary sacrifice
Tax year 2026/27 · England · tax code 1257L · no student loan · National Insurance category A. Engine comparison versus no pension.
| Gross before sacrifice | £45,000.00 |
|---|---|
| Take-home with sacrifice (key figure) | £34,192.08 |
| Take-home with no pension | £35,920.08 |
| Employee NI with sacrifice | £2,401.92 |
| Employee NI with no pension | £2,593.92 |
| Employer NI with sacrifice | £5,639.40 |
| Employer NI with no pension | £5,999.40 |
Illustrative annual figures from the shared employment package engine. Scheme rules and NMW still apply.
Compare take-home with salary sacrifice Use the Income Tax Calculator
Employer NI effects are covered in Employer National Insurance Explained. Work backwards from a net target with the Net to Gross Salary Calculator.
What happens if I leave my job?
The salary-sacrifice agreement is with that employer, so it normally ends when the employment ends. Contributions already paid into the pension remain invested under the scheme's rules — you may be able to transfer or keep deferred benefits, depending on the provider.
Announced future changes to salary-sacrifice tax treatment (for example measures discussed for April 2029) are not applied in Northline's current-year examples. Treat them as future rules until they are in force and reflected in the tax-year config.