Work out your take-home pay
Income tax, National Insurance and net pay for any UK salary, 2026-27.
Around 7.7 million UK employees give up part of their salary in exchange for pension contributions, and 290,000 employers run these arrangements through payroll [1]. HMRC estimates that the National Insurance forgone on pension salary sacrifice rose from £2.8 billion in 2016-17 to £5.8 billion in 2023-24 [1].
Those figures explain why salary sacrifice is one of the most common questions an employee asks HR, and one of the most common set-ups an employer asks its payroll provider to configure. The short answer is that it is usually worth it for basic and higher-rate taxpayers saving into a pension, and usually not worth it for employees on low pay, those about to claim statutory family pay, or those whose cash salary matters more than their pension pot.
This article answers the question with figures rather than generalisations. It sets out how salary sacrifice works legally, runs worked examples on the 2026-27 rules through the Moonworkers calculator engine, lists the costs that the headline saving hides, and explains what the £2,000 cap on National Insurance relief from 6 April 2029 changes.
Key takeaways
- Salary sacrifice is a contractual change: the employee gives up cash pay and the employer provides a non-cash benefit, usually a pension contribution [2].
- A £2,000 pension sacrifice on a £40,000 salary reduces take-home pay by £1,440, and the employer saves £300 of National Insurance on the 2026-27 rules.
- Pensions, cycle to work, childcare already in place and cars with CO2 emissions of 75g/km or less keep their tax advantages under the optional remuneration rules [3].
- Sacrifice cannot reduce cash pay below the National Minimum Wage, and it can reduce statutory pay and some state benefits [2].
- From 6 April 2029, pension sacrifice above £2,000 a year will attract employee and employer National Insurance, while income tax relief continues [4].
How salary sacrifice works
HMRC defines a salary sacrifice arrangement as "an agreement to reduce an employee's entitlement to cash pay, usually in return for a non-cash benefit" [2]. Its internal manual describes the same thing as an employee giving up "the right to part of the cash remuneration due under his or her contract" [5].
The contractual conditions
The arrangement works only if the employment contract changes and the employee agrees to the change [2]. HMRC treats a sacrifice as successful when it has "genuinely reduced the employee's entitlement to cash remuneration", and as unsuccessful when the employee keeps an entitlement to the original salary [6].
The revised terms can be partly or wholly verbal, but HMRC cannot advise on the wording of an employment contract [6]. Where the variation is effective, the lower cash salary becomes the employee's earnings and any non-cash benefit is taxed under the benefits code [7].
When employees can change their sacrifice
An arrangement that lets employees switch between cash and the benefit "whenever they like" loses its tax and National Insurance advantages [2]. HMRC accepts changes linked to a lifestyle event that significantly alters the employee's finances, such as marriage, divorce, or a partner being made redundant or becoming pregnant [2].
Changes to an arrangement can also affect the operation of PAYE, the tax due, the National Insurance due and any tax credit award, which is why HMRC treats the contract history as evidence [8]. HMRC also states that arrangements designed to use the pension and childcare exemptions "should not be regarded as avoidance" [8].
Which benefits still carry a tax advantage
Since 6 April 2017, the optional remuneration arrangement (OpRA) rules have largely withdrawn the income tax and National Insurance advantages of receiving benefits through salary sacrifice [3]. For most benefits, the taxable value is now "the greater of the amount of cash pay given up" and the normal benefit-in-kind value [3].
The benefits excluded from OpRA
A short list of exemptions survives the rules. HMRC's manual lists them by statutory section, and its payroll guidance confirms which ones employers do not need to value or report [9] [2].
| Benefit | Position under salary sacrifice | Notes |
|---|---|---|
| Employer pension contributions | Exempt from income tax and National Insurance | National Insurance relief capped from 6 April 2029 |
| Employer-provided pensions advice | Exempt | Listed alongside pension contributions |
| Cycles and safety equipment (cycle to work) | Exempt | No upper value limit for tax and National Insurance |
| Workplace nurseries | Exempt | Employer-run or jointly run childcare |
| Childcare vouchers | Exempt within limits | Only for employees who joined on or before 4 October 2018 |
| Cars with CO2 of 75g/km or less | Normal benefit-in-kind charge applies | OpRA comparison does not apply |
| Most other benefits (phones, gym, health cover) | Taxed on the higher of cash given up and benefit value | Advantage largely removed |
HMRC's own example shows the effect on a non-exempt benefit: an employee who sacrifices £360 for a mobile phone is taxed on £360 of earnings [10]. For electric and other cars at or below 75g/km, HMRC's company car calculator tells employers to answer "no" to the question about an optional remuneration arrangement [11].
Cycle to work and childcare
The Department for Transport's guidance states that "for tax and National Insurance purposes there is no limit on the value of the cycle and safety equipment", and that the hire period is typically at least 12 months [12]. The employee must not own the cycle during the hire and at least 50% of its use should be for qualifying journeys [12].
Childcare vouchers remain available only to employees who joined a scheme on or before 4 October 2018, and employers must stop providing them if the employee starts using Tax-Free Childcare [2] [13]. For everyone else, the pension is the main benefit where salary sacrifice still delivers a clear saving.
Worked examples on the 2026-27 rules
The examples below use the 2026-27 rates: employee National Insurance of 8% between £12,570 and £50,270 and 2% above, and employer National Insurance of 15% above £5,000 [14]. Every figure was produced by the Moonworkers calculator engine for an employee in England on tax code 1257L and category A.
A basic-rate taxpayer on £40,000
An employee earning £40,000 who sacrifices £2,000 into a pension has a cash salary of £38,000. The engine gives the following annual figures for both cases, on the thresholds published by HMRC [14] [15].
| Annual figure | Salary £40,000, no sacrifice | Salary £38,000 after £2,000 sacrifice | Difference |
|---|---|---|---|
| Income tax | £5,484.20 | £5,084.20 | £400 |
| Employee National Insurance | £2,194.40 | £2,034.40 | £160 |
| Take-home pay | £32,321.40 | £30,881.40 | £1,440 |
| Employer National Insurance | £5,250 | £4,950 | £300 |
The pension receives £2,000, and the employee's take-home pay falls by £1,440. The £160 of employee National Insurance is the part of the saving that only salary sacrifice delivers: a pension deducted from pay before income tax under a net pay arrangement also saves the £400 of income tax, but not the National Insurance [16] [2].
A higher-rate taxpayer on £55,000
An employee earning £55,000 who sacrifices £5,000 drops to a cash salary of £50,000, below the £50,270 higher-rate threshold [17] [14]. The engine shows income tax falling from £9,428.40 to £7,484.20, a saving of £1,944.20, and employee National Insurance falling from £3,110.60 to £2,994.40, a saving of £116.20.
Take-home pay falls by £2,939.60 for a £5,000 contribution, and the employer saves £750 of National Insurance. The employee National Insurance saving is smaller here because earnings above £50,270 attract only 2% [15]. For higher-rate taxpayers, the main gain is the 40% income tax relief received through payroll at source, rather than through a Self Assessment claim [16].
Student loan repayments
Salary sacrifice also reduces the earnings on which student loan repayments are calculated, because repayments are based on the lower cash salary. For a Plan 2 borrower on £40,000, the engine gives annual repayments of £955, falling to £775 after a £2,000 sacrifice, a reduction of £180 [14] [2].
With the loan included, take-home pay falls from £31,366.40 to £30,106.40, a reduction of £1,260 for a £2,000 pension contribution. Lower repayments mean the loan balance is cleared more slowly, and the mechanics are covered in the guide to student loan deductions.
Where salary sacrifice pays most
The examples above show a steady saving. Two income bands produce much larger effects, because they sit where allowances and benefits are withdrawn according to adjusted net income, which salary sacrifice reduces [1].
Income between £100,000 and £125,140
The Personal Allowance falls by £1 for every £2 of adjusted net income above £100,000 and reaches zero at £125,140 [17]. An employee earning £110,000 loses £5,000 of allowance, and a £10,000 sacrifice brings adjusted net income back to £100,000 [17] [1].
On tax code 1257L, the engine shows payroll income tax of £31,432 at £110,000 and £27,428.40 at £100,000, and take-home pay of £74,357.40 and £68,561 [14]. The payroll figures do not yet reflect the restored allowance, because PAYE applies the taper through a tax code change or Self Assessment. The returned £5,000 of allowance is worth a further £2,000 at the 40% rate, which is why sacrifice in this band is often described as carrying an effective 60% relief.
Child Benefit and Tax-Free Childcare
The High Income Child Benefit Charge claws back 1% of Child Benefit for every £200 of adjusted net income above £60,000, and the whole benefit is repaid above £80,000 [18]. Adjusted net income is calculated after pension contributions, so a sacrifice that moves income below £60,000 removes the charge [18].
Tax-Free Childcare is not available where either parent's expected adjusted net income exceeds £100,000 for the tax year [19]. The scheme adds £2 for every £8 paid in, up to £2,000 a year per child, so a sacrifice that brings income back under the limit can restore a valuable entitlement [13]. HM Treasury has confirmed that employees can continue to use salary sacrifice in this way after the 2029 cap, although contributions above £2,000 will attract National Insurance [4].
The costs the headline saving hides
Salary sacrifice reduces contractual pay, and contractual pay drives more than the payslip. The costs below are the reason a sacrifice that looks profitable on a net pay comparison can still be the wrong choice for a particular employee [2] [20].
The National Minimum Wage floor
A sacrifice "must not reduce an employee's cash earnings below the National Minimum Wage (NMW) rates", and employers must put procedures in place to cap the deduction [2]. For the 2026-27 pay year, the National Living Wage is £12.71 an hour for workers aged 21 and over and £10.85 for those aged 18 to 20 [21].
The rates change on 1 April every year, so a sacrifice that was compliant in March can breach the floor in April if pay is not reviewed [21]. Employees earning below the Personal Allowance save no income tax at all, and the Low Incomes Tax Reform Group gives an example of an employee on £11,700 who is £20 a month worse off through sacrifice than through a relief-at-source scheme [20].
Statutory pay and state benefits
Statutory Maternity Pay is 90% of average weekly earnings for the first 6 weeks, then £194.32 a week or 90% of earnings if lower, for up to 39 weeks [22]. Average weekly earnings are based on the reduced cash salary, and if a sacrifice reduces them below the Lower Earnings Limit, the employer does not have to make any statutory payment [2] [23].
HMRC's guidance also warns that sacrifice can affect earnings-related benefits such as Maternity Allowance and Additional State Pension, and that employees "may therefore pay, or be treated as paying, less or no National Insurance contributions" for contributory benefits [2]. The Low Incomes Tax Reform Group adds redundancy pay, paternity pay and shared parental pay to the list of entitlements that may fall [20].
Pension calculations, auto-enrolment and borrowing
Auto-enrolment requires a minimum total contribution of 8% of qualifying earnings, of which the employer pays at least 3%, on earnings between £6,240 and £50,270 a year [24] [25]. HMRC notes that the employer decides whether contributions are calculated on the reduced pay, and many use a notional pay figure so that employees "are not put at a disadvantage" [2].
A lower contractual salary can also reduce death-in-service cover, pay-linked bonuses and the income figure shown to a lender, so employers usually state which figure each policy uses. The interaction with pension assessment is covered in the guide to auto-enrolment explained. Total contributions also count towards the annual allowance, which is £60,000 for most savers and tapers where threshold income exceeds £200,000 and adjusted income exceeds £260,000 [26].
What it is worth to the employer
For the employer, the saving is 15% of every pound sacrificed above the secondary threshold, the employer National Insurance rate for 2026-27 [14]. In the £40,000 example, that is £300 a year for one employee, and the saving scales with headcount.
Passing on the National Insurance saving
Research commissioned by HMRC found that the most common reason employers offer pension salary sacrifice is "the NI savings for both the employer and their employees" [27]. Some employers pass part of that saving back by increasing their own pension contribution, which is the simplest way to make the arrangement visibly worthwhile to staff [27].
The same research cites ONS figures showing that 30% of private sector employees used pension salary sacrifice, against 9% in the public sector [27]. Employers weighing the saving against the payroll set-up should also check whether Employment Allowance already absorbs their National Insurance bill, a point explained in the guide to understanding employer National Insurance and confirmed on HMRC's rates page [14].
The payroll set-up
Payroll has to apply the sacrifice to the right pay elements, keep cash pay above the minimum wage in every pay period and report the reduced pay on the Full Payment Submission. An SME payroll platform holding the HMRC Recognised status calculates tax, National Insurance and student loans on the post-sacrifice figure automatically [2] [21].
Bureaux running sacrifice schemes for several clients need the same rules applied consistently across employers, which a multi-client payroll dashboard handles at client level. HR and benefits platforms that offer sacrifice inside their own product can pass the sacrificed amount to the HMRC-recognised payroll API as a pay element, rather than rebuilding the calculation [28] [2].
The £2,000 cap from 6 April 2029
The Budget of 26 November 2025 announced a cap on "NICs relief on salary sacrifice into pension schemes to the first £2,000 of pension contributions per person from 2029" [29]. Parliament legislated for the power in the National Insurance Contributions (Employer Pensions Contributions) Act 2026, which covers Great Britain and Northern Ireland [30].
How the cap will work
From 6 April 2029, earnings forgone above the £2,000 limit in a tax year will be subject to Class 1 primary and secondary National Insurance, while income tax relief is unchanged [1]. All employer pension contributions outside a sacrifice remain free of National Insurance, and employers will report the total amount sacrificed through their existing payroll software [4].
The government estimates that 3.3 million of the 7.7 million employees who use pension salary sacrifice give up more than £2,000 a year, and that those employees will pay an average of £84 more in National Insurance in 2029-30 [1]. The Budget states that the cap shields 74% of basic rate taxpayers using salary sacrifice [29].
What the cap would cost on today's rates
Using the 2026-27 rules as an illustration, an employee on £40,000 who sacrifices £4,000 would have the first £2,000 protected and the second £2,000 subject to National Insurance. In the engine figures above, moving from £38,000 to £36,000 of pay changes employee National Insurance by £160 and employer National Insurance by £300 [14] [1].
Those are the amounts that would be lost on the second £2,000 if the cap applied with the 2026-27 rates. Actual figures from 6 April 2029 will depend on the rates and thresholds in force at that time, and HMRC has said that details of the limit will be set out in secondary legislation [1]. Further guidance will be published on GOV.UK before April 2029 [4].
Model a sacrifice before agreeing it
Before an employee signs a variation, payroll or HR can compare take-home pay at the current and reduced salary with the Moonworkers UK salary calculator, which applies the 2026-27 PAYE, National Insurance and student loan rules to any gross salary.
£ per month
e.g. 1257L, S1257L, BR, D0
S = Scotland · C = Wales · W1/M1 = non-cumulative
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About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method with periodised thresholds. It handles the three tax territories, K codes with the 50% regulatory limit and its carry-forward, weeks 53, 54 and 56, the cumulative and W1/M1/X bases, student and postgraduate loans, and pension contributions on qualifying earnings. It still won't match your payslip to the penny in every case: it does not cover in-year tax code changes, payrolled benefits in kind, NI deferral across more than one employment, directors on the annual earnings period, or employer-level annual adjustments such as the Employment Allowance and the apprenticeship levy. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. K-code carry-forwards and weeks 53, 54 and 56 are handled, and the Year-to-date section reproduces a specific period exactly. What your employer may apply that this does not: a mid-year tax code change, benefits in kind processed through payroll, or NI deferral across more than one employment. For most employees on a standard tax code the difference is negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category — if in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
Salary sacrifice is worth it when three conditions hold together: the employee pays income tax and National Insurance on the sacrificed pay, the benefit is one of the few the optional remuneration rules still protect, and the lower contractual salary does not cost more in statutory pay, benefits or pay-linked entitlements than it saves. For most basic and higher-rate taxpayers saving into a pension, those conditions are met, and the gains are sharpest for anyone near the £60,000, £100,000 or £125,140 income lines.
The cap from 6 April 2029 narrows the National Insurance advantage without removing the income tax one, so the arrangement will remain useful but less generous for larger contributions. Employers that hold accurate sacrifice records in payroll now will have the reporting data the new rules require when they arrive.
Frequently asked questions
Does salary sacrifice reduce take-home pay?
Yes, but by less than the amount sacrificed. On the 2026-27 rules, a £2,000 pension sacrifice on a £40,000 salary reduces take-home pay by £1,440, because the employee saves £400 of income tax and £160 of National Insurance [14]. The full £2,000 still reaches the pension [2].
Is salary sacrifice worth it for low earners?
Often not. Employees earning below the Personal Allowance save no income tax, sacrifice cannot take cash pay below the National Minimum Wage, and a lower salary can reduce statutory maternity and other family pay [2] [20]. A relief-at-source pension can leave a low earner better off.
Can an employee stop salary sacrifice at any time?
Not freely. HMRC accepts changes linked to a significant lifestyle event such as marriage, divorce or a partner's redundancy or pregnancy, and an arrangement that lets employees switch whenever they like loses its tax advantages [2]. Many schemes also allow an annual review window set out in the contract [6].
Will salary sacrifice still be worth it after April 2029?
For income tax, nothing changes: sacrificed pension contributions remain free of income tax subject to the usual limits [4]. The National Insurance saving will apply only to the first £2,000 a year, and the government estimates that 56% of current users sacrifice less than that and are fully protected [1].
