UK Salary Sacrifice Calculator — 2025-26 Tax Year

What is salary sacrifice?

Salary sacrifice (sometimes called salary exchange) is an arrangement between an employer and employee where the employee agrees to a reduction in their contractual gross salary. In return, the employer provides a non-cash benefit of equivalent value — typically pension contributions, but also cycle-to-work schemes, electric car leases, childcare vouchers, or holiday trading.

The key advantage is that both parties save on National Insurance contributions, because NI is calculated on the reduced salary rather than the original figure. For higher-rate taxpayers, the income tax savings can be substantial too.

How salary sacrifice works in practice

Consider an employee earning £40,000 who agrees to sacrifice 5% (£2,000) of their salary for pension contributions:

• Their contractual salary reduces to £38,000
• The employer pays £2,000 directly into the pension scheme
• The employee saves income tax on £2,000 (£400 at basic rate)
• The employee saves NI on £2,000 (£160 at 8%)
• The employer saves NI on £2,000 (£300 at 15%)
• Total combined saving: £860 per year

The pension pot receives the full £2,000, but the combined tax and NI saving is £860 — money that would otherwise have gone to HMRC.

Which benefits qualify for salary sacrifice?

Since the 2017 Optional Remuneration Arrangement (OpRA) rules, only certain benefits retain their full tax advantages under salary sacrifice:

• Pension contributions — the most common and typically highest-value salary sacrifice arrangement
• Cycle-to-work schemes — tax-free bicycle and equipment loans up to any value
• Ultra-low emission vehicles — electric car salary sacrifice with very low BIK rates (2% in 2025-26)
• Childcare vouchers — closed to new entrants but existing members retain the benefit
• Holiday trading — buying or selling annual leave days via salary adjustment

April 2025 changes: why salary sacrifice matters more than ever

The 2025-26 tax year brought significant increases to employer National Insurance: the rate rose from 13.8% to 15%, and the secondary threshold dropped from £9,100 to £5,000. These changes make salary sacrifice even more valuable for employers looking to offset higher employment costs.

Our employer NI calculator reflects these April 2025 changes and can model the savings across multiple benefit types simultaneously.

Scottish vs rest of UK tax rates

Scotland has its own income tax bands with six rates (from 19% starter rate to 48% top rate), compared to three for the rest of the UK. Scottish taxpayers often save more from salary sacrifice at certain income levels due to the intermediate and higher rate thresholds. Our employee calculator supports both Scottish and rest-of-UK tax calculations.

NMW compliance and salary sacrifice

A critical consideration: salary sacrifice must not reduce an employee's effective hourly rate below the National Minimum Wage or National Living Wage. For the 2025-26 tax year, the NLW is £12.21 per hour for workers aged 21 and over. Our calculators include automatic NMW compliance checking to flag any arrangements that would breach this threshold.

Read our detailed guide: NMW and salary sacrifice compliance.