Salary sacrifice is an agreement to give up part of your cash pay in return for a non-cash benefit, such as extra pension or super contributions, a car or a bike. Done correctly it can cut income tax (and in the UK, National Insurance), but it must be agreed before the pay is earned and written into the employment contract.
Salary sacrifice sounds like a perk with no downside, and for pension contributions it often is. For other benefits, the tax rules have been tightened, and the drop in cash pay can quietly reduce statutory pay and benefits. Here's how HMRC and the Australian Taxation Office describe it, side by side.
How salary sacrifice works in the UK
HMRC defines it as an agreement to reduce an employee's entitlement to cash pay, usually in return for a non-cash benefit. The employer changes the terms of the employment contract, and the employee has to agree. Every time someone opts in or out, the contract must be altered again, and it must be clear what the cash and non-cash entitlements are at any time.
- The sacrifice must never take cash pay below the National Minimum Wage, and employers need a process to cap it.
- Switching between cash and the benefit whenever the employee likes usually removes the tax and National Insurance advantage.
- Changes are allowed when a lifestyle change significantly alters an employee's finances.
- HMRC won't comment on a proposed arrangement before it's in place.
Which UK benefits still save tax
This is the bit that changed. For new arrangements, HMRC says the benefit is valued at the higher of the cash given up or the normal benefit in kind charge, and most benefit in kind exemptions don't apply through salary sacrifice. The benefits you don't have to value or report are:
| Benefit | Status through salary sacrifice (HMRC) |
|---|---|
| Payments into pension schemes | Not valued or reported |
| Employer-provided pensions advice | Not valued or reported |
| Childcare vouchers and directly contracted childcare | Only if the arrangement started on or before 4 October 2018 |
| Bicycles and cycling safety equipment, including cycle to work | Not valued or reported |
| Cars with CO2 emissions of no more than 75g/km | Use the normal benefit in kind charge |
| Most other benefits | Valued at the higher of the cash given up or the benefit in kind charge |
HMRC's own example shows the pension case: a £5,000 employer contribution to a registered pension scheme through salary sacrifice carries no income tax or National Insurance charge for the employee, and the full amount goes into the pension (as of October 2026).
The UK side effects to check first
Because cash pay goes down, so can everything calculated from it. HMRC warns that salary sacrifice can reduce or remove entitlement to earnings-related benefits such as Maternity Allowance and contribution-based benefits such as State Pension. If it pushes average weekly earnings below the lower earnings limit, the employer doesn't have to make statutory payments such as maternity or sick pay at all. Employers decide whether pension contributions, overtime rates and pay rises are based on the old notional salary or the new cash salary, and they need to make that clear.
How salary sacrifice works in Australia
The ATO also calls it salary packaging or total remuneration packaging. You agree to receive less income before tax, and your employer provides benefits of similar value. To be effective, the arrangement must be agreed before you perform the work, and it can't include salary, leave, bonuses or commissions you've already earned. If it isn't effective, the benefits are taxed as normal income.
Some packaged benefits are fringe benefits, so the employer pays fringe benefits tax and may ask you to make an employee contribution to reduce it. One date to note: the ATO says that from 1 April 2027, work-related items provided through a salary sacrifice arrangement will no longer be exempt and will be subject to FBT.
The ATO car example that surprised me
The ATO works through an employee, Sam, on $65,000 a year packaging a $35,000 car with $11,500 of running costs for 2025 to 2026 (as of October 2026). With no packaging, his net disposable income is $41,912.00. Packaging the car with no employee contribution leaves him with $41,611.96, slightly less. Packaging it with a $7,000 employee contribution leaves $43,593.40. So the same car can make you worse off or better off, depending on how the deal is structured.
Salary sacrificing into super
Sacrificed super contributions count as employer contributions and are taxed in the fund at 15%, which the ATO says is generally less than your marginal rate. Your employer must still pay the full super guarantee as if there were no sacrifice, and the contributions count towards your concessional cap. Division 293 tax can apply if your income and concessional contributions together exceed $250,000.
Before you sign a salary sacrifice arrangement
- Ask exactly which benefit you're getting and how it's valued for tax.
- Check your cash pay stays above the minimum wage.
- Ask whether pension, overtime and pay rises use your old or new salary.
- If you're planning a family, check the effect on statutory pay or Maternity Allowance.
- In Australia, check the FBT position and any employee contribution, and your concessional cap for super.
- Get the agreement in writing before the pay period it covers.
Payroll handles most of this, so pick UK payroll software or benefits administration software that records sacrifices correctly. Australian employers should also know the Payday Super rules.
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My verdict
For pension and super contributions, salary sacrifice is usually a good deal, and both HMRC and the ATO confirm the tax treatment. For almost everything else, run the numbers first, because the ATO's own example shows a packaged car can leave you worse off. And if you're an employer, put every change in the contract, or you'll lose the advantage you set it up for.
For the rest of the series, see the Creator Pay Rates: What YouTube, TikTok, Instagram, Facebook and Snapchat Really Pay (75 Answers).
Frequently asked questions
What is salary sacrifice?
An agreement to give up part of your cash pay in return for a non-cash benefit, such as pension contributions, written into your employment contract.
Does salary sacrifice save National Insurance in the UK?
It can. HMRC's example shows an employer pension contribution through salary sacrifice carries no income tax or National Insurance charge for the employee.
Can salary sacrifice take my pay below minimum wage?
No. HMRC says it must not reduce cash earnings below National Minimum Wage rates.
Can salary sacrifice affect maternity pay?
Yes. If it reduces average weekly earnings below the lower earnings limit, the employer doesn't have to make statutory payments, and Maternity Allowance can be reduced.
Is salary sacrificed super taxed?
Yes, at 15% in the fund. The ATO says this is generally less than your marginal tax rate.
Do I still get the super guarantee if I salary sacrifice?
Yes. Your employer must pay your full super guarantee as though there was no salary sacrifice arrangement.
