Your guide to salary sacrifice

Salary sacrifice is a clever way for you to pay for something directly from your salary before tax is taken. You can often save money and put more towards your future with these schemes, and this blog will explain how.

What is salary sacrifice?

Salary sacrifice is an agreement between you and your employer, where you agree to give up a part of your gross salary in exchange for a non-cash benefit, supplied by your employer.

Your gross salary is the money you’ve earned before tax, so using salary sacrifice will reduce your taxable income – which could mean you pay less in Income (PAYE) Tax.

Salary sacrifice schemes are similar to payment plans, where a set amount will be taken from your gross salary to pay for a scheme – as long as your pay (after the amount sacrificed) remains above minimum wage.

But these schemes aren’t about taking money off you, they’re about redirecting some of your pay cheque towards your financials goals through a government-backed scheme.

What can salary sacrifice be used for?

The most common salary sacrifice schemes are:

• Pension contributions – add more to your retirement savings, giving your pot more time to potentially grow.

• Cycle-to-work – spread the cost of a bike and accessories, whilst saving money.

• A new car – some employers lease cars through salary sacrifice schemes.

• The latest tech – including new laptops, phones and tablets, you can sacrifice some of your salary for a new device. 

Other salary sacrifice schemes can include childcare vouchers, car parking, gym memberships, personal learning, and many more.

Those within the higher tax bracket (40% tax on earnings over £50,271) could use salary sacrifice arrangements to reduce their taxable pay, potentially into the basic rate tax bracket (20% tax on earnings over £12,570).

Also, if you have a gross annual salary over £60,000 and you or your partner are in receipt of child benefits, you may be liable to pay a tax charge to the government. You could use salary sacrifice to retain this important benefit, by lowering your income below the threshold.

The above examples tax bracket and child benefit examples are specific to England, Wales and Northern Ireland. If you’re a resident of Scotland, you can view your tax rates at www.gov.uk/scottish-income-tax.

Shared Cost AVCs: The hidden gem for LGPS members

Although there are many salary sacrifice options, we’re shining a light on Shared Cost Additional Voluntary Contributions (AVC) scheme – a valuable perk for Local Government Pension Scheme (LGPS) members.

Compared to standard salary sacrifice pension contributions, a Shared Cost AVC plan can allow you save on National Insurance contributions also – saving you even more in tax deductions.

For example, with the available tax savings, you could sacrifice £72.08* of your salary as a basic rate taxpayer, and £100 would be added to your pot per month. This pot would be separate to your LGPS pot and adding £100 per month for 15 years could build a pot of £22,697.27†.

Your potential tax savings are based on your individual circumstances and may be subject to change in the future. The above example is based on England, Wales and Northern Ireland – if you’re a resident of Scotland, you can visit our calculator here to understand your potential tax savings.

You may be eligible to take all or part of your Shared Cost AVC plan as a tax-free lump sum from age 55 onwards, as long as you take it at the same time as your LGPS benefits, and it does not exceed 25% of the combined value of your plan and LGPS benefits±. It’s important to explore all your pension withdrawal options if you’re thinking about taking your benefits. Contact your pension scheme to learn more about your withdrawal options and speak to an independent financial advisor if you need financial advice.

You can begin saving more today by applying for a Shared Cost AVC plan here – this is only available to active LGPS members and cannot be accessed as a retirement benefit until age 55, rising to age 57 from 2028.

Important salary sacrifice considerations

Some salary sacrifice schemes could impact the amount you can save for your retirement, your mortgage affordability and even impact your eligibility for employer and state benefits. We have outlined all key considerations you might need to know if you’re thinking about entering into a salary sacrifice scheme.

Mortgage affordability

Mortgage lenders often determine your loan amount based on your gross income, and by reducing this with salary sacrifice, you may reduce the mortgage amount you can qualify for. This can often depend on the lender, so it’s important to explain your salary sacrifice arrangement and provide proof of your total pre-sacrifice income for consideration.

Equally, if you already have a mortgage, reducing your income would mean that you’d have less take-home pay each month, and therefore, less to pay off your mortgage with. It’s important to consider if a salary sacrifice arrangement would be the best thing for you, and if you can afford to reduce your income.

It’s important to remember that your home may be repossessed if you do not keep up repayments on your mortgage. 

Salary-dependent employer benefits

Within the workplace, there can be many benefits related to your annual salary and if you choose to reduce this via a salary sacrifice scheme, you may not qualify for the same benefits.

For example, work-related statutory payments (such as maternity pay or sick pay) are based on your gross annual salary. By reducing this, the amount you would be paid on maternity leave or whilst taking time off due to illness, would be less.

Your workplace may also offer death in service and ill-health retirement benefits that could be based on your total gross salary. Reducing your income via salary sacrifice could limit the amount you or your family would receive in one of these events.

Each workplace is different and has different benefits based on the employer. They may have their own policies for statutory payments, death in service, or even ill-health retirement benefits which aren’t affect by salary sacrifice. It’s a good idea to check with your employer on the conditions of these benefits before deciding on a salary sacrifice arrangement.

State benefits eligibility

Salary sacrifice can reduce your entitlement to state benefits as they are often calculated with your post-sacrifice amount. The main benefit to consider is your State Pension contributions. If you lower your salary via salary sacrifice schemes, you must ensure that your monthly income is more than £542 to qualify for the Lower Earnings Limit of the State Pension[1].

In most cases, salary sacrifice schemes can not take you below the National minimum wage earnings, which is above the Lower Earnings Limit. Therefore, you should still qualify for the State Pension, but you may be entitled to less if you fall below certain thresholds. You can learn more about the State Pension limits here to see what your earnings limit would be to still be eligible for the same State Pension.

Auto-enrolment & private pension schemes

Entering into a salary sacrifice scheme will reduce your gross salary, as funds are taken to pay for your scheme. Therefore, if you keep the same percentage of pension contributions, the amount you contribute into your pension will go down as it will be based on your new, gross, post-sacrifice salary.

Defined benefit pension schemes (NHS & LGPS)

Your pension is worked out using your pensionable pay – essentially your gross salary for the year. If you choose a salary sacrifice scheme (for example, to lease a car or buy a laptop), your gross salary will be reduced. That means your pensionable pay is lower, and so your pension could end up smaller.

However, LGPS members can still take advantage of a salary sacrifice scheme without reducing their pensionable pay. By using a Shared Cost AVC scheme to contribute more into your pension, your original salary will still be used to calculate your total pensionable pay. Meaning your pension income will not be impacted by using a Shared Cost AVC scheme. Whereas, leasing a car, for example, is ‘non-pensionable’ meaning that your lower salary will be used to calculate your pensionable pay.

If you’re close to retirement

If you’re less than 12 months away from retirement as an LGPS member – even a small reduction in salary could have an impact on your final pension. Typically, your pension is based on the salary you had for the last 365 days of local government service. There may be other considerations, such as looking at your final two years’ salary, depending on when you started your service with the local government.

Therefore, it’s important to think about how a salary sacrifice scheme, such as leasing a car, may reduce your pensionable pay this close to retirement. Whereas, Shared Cost AVC schemes could help you save even more for retirement and they do not affect your final salary calculations for your pension. If you need help understanding your pensionable pay, and how a Shared Cost AVC scheme could help you save more, you can book an LGPS coaching session with one of our Financial Education coaches here.

If you’re an NHS or private sector employee, the last 12 months of your working career has less of an impact towards your final pension pot. However, it’s still important to fully understand how your total pensionable pay is worked out before entering a salary sacrifice scheme at this point of your working career.

How do I get started with Salary Sacrifice?

As a first step, you can check what salary sacrifice options your employer offers and explore what might be best for you by contacting your employer.

If you’re an LGPS member with a My Money Matters account, you can use our calculator to see how much you can save for your future with a Shared Cost AVC scheme. It’s important to remember that Shared Cost AVCs do not impact your pensionable pay.  

Salary sacrifice involves a legally binding change to your employment contract, and you should make sure that it’s the right thing for you before agreeing to it. It may help you make the most of your pay cheques by taking advantage of tax-savings that could help you to afford a new laptop, a car, or even putting more towards your future.

Have any questions?

If you have any questions or want to know more about how My Money Matters can support your financial wellbeing, our dedicated support team are on hand to help you. You can call them on 01252 959 779 or email support@my-money-matters.co.uk.  

Disclaimers to note

My Money Matters has no control or responsibility for the external pages linked within this blog, or where any subsequent links you may take you.

A pension is a long-term investment, and the fund value may fluctuate and can go down. It’s important to consider what investment product is suitable for you. Please speak to an independent financial adviser if you require financial advice. 

You should consider your affordability before making your application. While contributing to a Shared Cost AVC plan is tax-efficient now, most pension income is typically taxed at your marginal rate of income tax in retirement. 

*Basic rate savings are displayed as a guide only. Basic rate assumes an individual paying 20% Income Tax and 8% National Insurance contributions. The actual savings will depend on your personal circumstances and investment fund performance, which is invested by your Shared Cost AVC provider. 

†Figures are for illustrative purposes only. The figures shown are only estimates based on limited assumptions and assume a net assumed growth rate of 3%. This growth rate assumption is after any fees payable to the AVC provider. They do not include the impact of inflation and are not guaranteed or a personal recommendation. 

±It’s important to remember that the total tax-free cash from all your pension benefits cannot exceed 25% of £1,073,100 (£268,275).

A lot of the examples featured within this blog relate to England, Wales and Northern Ireland’s tax rules and regulations. If you’re a resident of Scotland, you can find out your potential tax savings within our calculator here, or look on https://www.gov.uk/scottish-income-tax to understand your tax rates.  

Information is based on our current understanding of taxation legislation and regulations. The information included in this blog is accurate as of October 2025.

[1] Data sourced via: www.gov.uk/government/publications/rates-and-allowances-national-insurance-contributions/rates-and-allowances-national-insurance-contributions