Salary Sacrifice for Trade Businesses — A Plain-English Guide for 2026

What Salary Sacrifice Actually Is

Salary sacrifice is an agreement where an employee gives up part of their contractual gross salary in exchange for a non-cash benefit — most commonly extra pension contributions, a bike, or an electric car. It is not a deduction from net pay. The employee's gross pay is genuinely reduced, and in return the employer provides the benefit.

That reduction in gross pay is where the savings come from. Because the sacrificed amount never counts as salary, neither the employee nor the employer pays National Insurance on it. The employee also avoids income tax on the sacrificed amount. So a chunk of money that would have been taxed and NI'd instead goes straight into a pension or towards a qualifying benefit. Both sides win — the employee keeps more, and the employer's NI bill drops.

The key word is contractual. You are formally varying the employee's terms — their stated salary changes. That has consequences (covered below) and means it has to be set up properly, in writing, before the salary is earned.

Which Schemes Still Save Tax in 2026

In April 2017 HMRC introduced the Optional Remuneration Arrangements (OpRA) rules. These removed the tax and NI advantage from most salary-sacrifice benefits by taxing the employee on the higher of the cash given up or the benefit value. In plain terms: for most benefits, sacrificing salary no longer saves anything because you get taxed as if you'd taken the cash anyway.

But three significant exemptions survived OpRA and remain fully effective. These are the ones that matter for trade businesses:

• Pension contributions — the big one. Sacrificing salary into a workplace pension still saves income tax and NI in full. The employer NI saved can either be passed on to boost the employee's pension, or kept by the business.
• Cycle-to-work — bikes and safety equipment through an approved scheme remain exempt, so the sacrifice still saves tax and NI.
• Ultra-low-emission and electric company cars — cars with very low CO₂ emissions kept their advantage. Combined with the low benefit-in-kind rates on electric vehicles, an EV through salary sacrifice is one of the most tax-efficient perks available.

Benefits sacrificed for since April 2017 that lost their advantage include health screening, gym memberships, mobile phones, and most general perks. You can still offer them, but doing so through salary sacrifice no longer produces a tax saving — the employee is taxed on the higher of the cash or the benefit.

Quick Reference: What Still Works

What the Employer Gets Out of It

The headline benefit for you as the business owner is a lower employer National Insurance bill. Employer NI is charged on what you pay your staff above a threshold, so every pound an employee sacrifices into their pension is a pound you no longer pay employer NI on. Across a few employees making regular pension sacrifices, that adds up to a meaningful annual saving.

You have a choice with that saving. You can keep it in the business — a straightforward cost reduction — or you can pass it on by paying it into the employee's pension on top of what they sacrificed. Passing it on costs you nothing extra (you were going to pay it as NI anyway) and makes the scheme far more attractive to staff, which helps with retention. Many trade firms split the difference or pass it on in full as a recruitment perk.

For a director paying themselves through a limited company, pension salary sacrifice is also a clean way to move money into a pension tax-efficiently rather than drawing it as salary or dividends.

What the Employee Gets Out of It

The employee saves both income tax and employee National Insurance on the amount they sacrifice. For a basic-rate taxpayer, that is a combined saving on income tax plus NI on every pound sacrificed — money that would otherwise have been taxed before it reached their bank account now goes into their pension in full.

For pension sacrifice specifically, this means the employee builds their pension pot faster than if they made the same contribution out of taxed pay. For an electric car, it means driving a brand-new EV for a net cost far below the list price, because the monthly cost comes out of gross rather than net salary and the benefit-in-kind charge on a low-emission car is small.

Worked Example: Pension Salary Sacrifice

These numbers are illustrative and use current rates as an example — your accountant will confirm the exact figures for your situation, and rates change. Take an employee earning £30,000 who wants to put £200 a month (£2,400 a year) into their pension by salary sacrifice.

• The sacrifice: the employee's contractual salary drops from £30,000 to £27,600. The £2,400 goes into their pension instead.
• Employee income tax saved: at the basic 20% rate, the £2,400 sacrificed avoids around £480 of income tax.
• Employee NI saved: at the basic employee NI rate (illustratively 8%), the £2,400 avoids around £192 of employee NI.
• Net cost to the employee: the full £2,400 lands in their pension, but their take-home pay only falls by roughly £1,728 — the rest was tax and NI they would have lost anyway.
• Employer NI saved: at the employer NI rate (illustratively 15%), the business saves around £360 a year on this one employee.

So the employee gets £2,400 into their pension for a take-home reduction of under £1,800, and the business saves £360. If the employer chooses to pass on its £360 NI saving, the employee's pension contribution rises to £2,760 a year at no extra cost to the company. Multiply that across a team and over several years and the effect on both your NI bill and your staff's retirement savings is substantial.

The Pitfalls and Cautions

Salary sacrifice is legitimate and HMRC-recognised, but there are firm rules and several traps. Get any of these wrong and the saving can evaporate — or worse, you can land the employee in difficulty.

• You cannot sacrifice below the minimum wage. An employee's post-sacrifice salary must still meet the National Minimum Wage or National Living Wage for every hour worked. This is the single most common reason a trade employee on or near minimum wage cannot use the scheme — there is simply no headroom to sacrifice.
• It must be a proper contractual variation, agreed before the salary is earned. You cannot backdate salary sacrifice. The change to the employee's contract has to be in place before the pay period it applies to. Retrospective arrangements are not valid.
• It can reduce statutory pay. Because gross salary is lower, statutory maternity, paternity and sick pay — which are calculated on earnings — can be reduced. Time a pension sacrifice badly and an employee about to go on maternity leave could lose out.
• It affects mortgage affordability. Lenders assess affordability on gross salary. A lower stated salary can reduce how much an employee can borrow. Anyone planning to apply for a mortgage soon should think carefully before sacrificing.
• It can affect other earnings-linked entitlements. A lower gross salary can reduce things tied to earnings, so the employee needs to understand the full picture before agreeing.
• The employment contract must be updated. The arrangement only works if the paperwork reflects it. Issue a written variation to the contract recording the new salary and the benefit provided.

Setting It Up Properly

Salary sacrifice touches payroll, contracts and pension administration, and the savings only hold up if the mechanics are right. This is one area where a quick conversation with your payroll provider or accountant before you start will save you headaches later. They will set up the deduction correctly in payroll, draft the contract variation, and confirm the current rates and thresholds so your numbers are accurate for the year.

This guide is general information, not tax advice. The rates used in the example are illustrative and change over time, and everyone's circumstances differ — get a payroll specialist or accountant to set up any salary-sacrifice arrangement for your business.