Salary Sacrifice for Umbrella Workers
Exchange part of your salary for non-cash benefits and save on tax and National Insurance contributions.
Understanding Salary Sacrifice
Salary sacrifice is an arrangement where you agree to give up part of your cash salary in exchange for non-cash benefits. Because the sacrificed amount is taken before tax and National Insurance are calculated, both you and your employer make savings.
For umbrella workers, this means you can exchange gross income for alternative forms of compensation — such as enhanced pension contributions or cycle purchases — that reduce your tax and NI liability.
This allows you to customise your remuneration package to suit your personal circumstances while keeping more of your earnings.
How the Savings Work
Your Gross Pay Reduces
The sacrificed amount is deducted before tax calculations.
Less Tax & NI Deducted
You pay income tax and NI on a lower amount.
You Get the Benefit
Enhanced pension or a bike — at a lower real cost to you.
How It Works — A Worked Example
See how salary sacrifice can increase your pension contributions while reducing your tax bill.
Without Salary Sacrifice
With Salary Sacrifice (10%)
Net pay is £30 less, but pension contribution is £27 more — a £29 weekly tax saving.
What Changed in 2017
In April 2017, the government limited the tax advantages of most salary sacrifice schemes. Benefits like training, parking, health checks, phones and gym memberships no longer qualify for tax relief through salary sacrifice.
However, two key exceptions remain available to umbrella workers:
Pension Contributions
Enhance your workplace pension beyond the minimum auto-enrolment amounts.
Cycle to Work Scheme
Purchase a bike and accessories through your employer at a discounted rate.
Impact for Umbrella Workers
Salary sacrifice reduces both employer and employee National Insurance contributions, plus PAYE income tax. The savings can be significant:
Basic-rate taxpayer (20%)
On a £100 Cycle to Work sacrifice:
Higher-rate taxpayer (40%)
On a £100 Cycle to Work sacrifice:
Things to Consider
Salary sacrifice isn’t right for everyone. Here are some important considerations before you opt in.
Mortgage Applications
Reduced gross income may affect how much you can borrow, as lenders typically assess affordability based on your gross salary figure.
State Benefits
Could affect eligibility for Statutory Maternity Pay, State Pension and other benefits that are calculated based on your NI contributions or earnings.
National Minimum Wage
Your post-sacrifice salary must not fall below the National Minimum Wage. We’ll check this before setting up any arrangement.
Get Advice First
We always recommend consulting a financial adviser before entering a salary sacrifice arrangement to ensure it’s the right choice for your circumstances.
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Interested in Salary Sacrifice?
Come in and see us, or give us a call. We’d love to discuss how salary sacrifice could work for you.