Salary sacrifice (sometimes called salary exchange) is an arrangement in which an employee agrees to give up a portion of their gross salary in exchange for a non-cash benefit of equivalent value provided by the employer. The reduction in gross pay means the employee pays less income tax and, in most markets, less social insurance on the sacrificed amount, while the employer also pays lower employer social contributions on the reduced salary. Both parties benefit from the tax efficiency of the arrangement.

In consulting, salary sacrifice is most common in markets where the regulatory framework explicitly supports it — most notably the UK, where salary sacrifice for pension contributions, electric vehicles, cycle-to-work schemes and childcare vouchers has become a standard component of flexible benefits design. It is less common in markets where the tax treatment is less favourable or where employment law creates complications around minimum wage obligations.

Common Salary Sacrifice Arrangements in Consulting

• Pension contributions — The most widely used form of salary sacrifice. The employee directs a portion of their salary into their pension via sacrifice rather than taking the cash and contributing personally. Both the employee and the employer save on social contributions; in the UK, for example, neither pays National Insurance on the sacrificed amount. For consulting firms with significant numbers of higher-rate taxpayers, pension salary sacrifice can be a material benefit.
• Electric vehicles — Company car schemes structured as salary sacrifice have grown significantly in many markets following the introduction of very low benefit-in-kind tax rates for electric vehicles. An employee sacrifices a monthly salary amount and receives use of an electric vehicle in exchange, often at a lower net cost than purchasing or leasing privately.
• Cycle-to-work — A UK scheme allowing employees to sacrifice salary for a bicycle and cycling equipment, typically up to a defined value, with the tax saving partially offsetting the cost.
• Childcare and other benefits — In some markets, salary sacrifice arrangements extend to childcare costs, holiday purchases, gym memberships and other lifestyle benefits, though the specific eligible categories and tax treatment vary by jurisdiction.

Salary Sacrifice and Benchmarking

Salary sacrifice arrangements complicate compensation benchmarking because they reduce the gross salary figure reported and received, while increasing the effective total value of the package. A consultant whose gross salary is reduced from £90,000 to £85,000 as part of a pension salary sacrifice arrangement is not earning less than market — they are receiving the equivalent value in a more tax-efficient form.

For benchmarking purposes, it is important to compare gross salary figures on a consistent basis — either all pre-sacrifice or all post-sacrifice — and to capture the benefit value separately when calculating total compensation. Firms that report post-sacrifice salary figures without noting the arrangement may appear to be paying below market when their effective total package is competitive. See Benefits and Total Rewards.