Calculate National Insurance savings from salary exchange (salary sacrifice). Find the exact NI reduction for both employee and employer on pension, cycle-to-work, and EV schemes.
Salary exchange (formally salary sacrifice) is an agreement between an employee and employer where the employee gives up part of their contractual cash salary in exchange for a non-cash benefit. Because the benefit is not salary, both the employee and employer pay less National Insurance — and the employee also pays less income tax. Common schemes include pension contributions, cycle-to-work, electric vehicles, and childcare vouchers.
Employee NI saving: For every £1,000 sacrificed below the Upper Earnings Limit (£50,270), you save £80 in employee NI at 8%. Above £50,270, you save only £20 (2%). Employer NI saving: The employer saves £138 per £1,000 sacrificed (13.8% Class 1 NI). Many employers pass some or all of their NI saving to the employee's pension, boosting the benefit further.
Yes — your official salary is lower after salary exchange, which can affect mortgage affordability calculations. Mortgage lenders typically use your contract salary (not gross earnings before sacrifice). If the exchange significantly reduces your headline salary, discuss with a mortgage broker whether to temporarily reduce salary exchange during a mortgage application.
There is no specific HMRC limit on salary exchange for pensions beyond the annual allowance (£60,000 for 2024/25) and the requirement that salary cannot be reduced below the National Minimum Wage (NMW). Practically, you should not sacrifice so much salary that you cannot meet NMW requirements for your contracted hours.
Yes — salary exchange reduces your declared employment income, which can affect Universal Credit calculations since UC is based on actual net earnings. The reduction in salary may also affect entitlement to benefits linked to income levels. Always consider the effect on benefit entitlements before entering a salary exchange arrangement.