Salary Sacrifice & Student Loans
A comprehensive guide to using salary sacrifice schemes to legally reduce your student loan repayments while gaining other benefits like pension contributions, electric cars, or cycle-to-work schemes.
Student loan impact
9p per £1
Plan 2 (6p per £1 for postgraduate loans)
Income Tax Saved
20–45% (England/Wales)
Depends on marginal band, Scotland uses different bands/rates
NI Saved
~8% / 2%
Typical employee Class 1 NIC: ~8% between thresholds; 2% above UEL (check tax year)
Typical combined saving
≈37–63%
Depends on tax band, NIC position & whether both UG & PG loans apply
ℹ️What is Salary Sacrifice?
Salary sacrifice is a contractual arrangement where you agree to receive a lower gross salary in exchange for a non-cash benefit. Because your official salary is lower, you pay less in tax, National Insurance, AND student loan repayments.
How Salary Sacrifice Reduces Student Loan Repayments
Salary sacrifice reduces the gross pay that counts for tax, National Insurance and student-loan calculations, so every £1 you sacrifice reduces Plan-2 student-loan repayments by 9p (6p for Postgraduate loans). The precise tax and NI savings depend on your marginal tax band and NIC rates in the tax year in question.
- Less of your income is above the repayment threshold
- Your 9% (or 6% for PG loans) is calculated on a smaller amount
- You pay less toward your student loan each month
📝 Basic Example: £40,000 Salary on Plan 2
Without Salary Sacrifice:
Salary: £40,000
Threshold: £28,470
Amount over threshold: £11,530
Annual SL repayment: £1,037.70 (9%)
With £5,000 Pension Sacrifice:
Effective salary: £35,000
Amount over threshold: £6,530
Annual SL repayment: £587.70 (9%)
Student loan saving: £450/year (plus tax & NI savings!)
Common Salary Sacrifice Schemes
💰Pension Contributions
The most common and usually most beneficial salary sacrifice:
- Often comes with employer matching (free money!)
- Save income tax + NI + student loan repayments
- Money grows tax-free until retirement
- Can sacrifice up to £60,000/year (or 100% of earnings)
Best for: Almost everyone, especially if employer matches contributions
📊Electric Car Schemes (e.g., Octopus Electric, Tusker)
Increasingly popular due to low benefit-in-kind tax:
- Lease a new electric car through your employer
- BIK tax on EVs has been low in recent years (eg 2% in some years), check the applicable tax year
- Includes insurance, maintenance, breakdown cover
- Typical monthly sacrifice varies by car model and provider, check the scheme provider or run the calculator for exact costs
Best for: Those needing a car who want maximum savings and a new EV
🎓Cycle to Work Scheme
Tax-free way to get a bike for commuting:
- Bikes and accessories up to £1,000 (some schemes higher)
- Spread cost over 12 months salary sacrifice
- Typical savings vary, calculate for your tax band and the scheme’s price rather than relying on a single percentage
- Often can buy the bike at end for small fee
Best for: Commuters wanting a new bike or e-bike
⚡Tech Schemes (Phones, Laptops, etc.)
Similar to cycle scheme but for technology:
- Latest phones, tablets, laptops through payroll
- Typically 12-36 month sacrifice periods
- BIK tax applies but still cheaper than buying outright
- Often includes insurance and AppleCare
Best for: Those who upgrade devices regularly anyway
🎯Childcare Vouchers (Legacy Scheme)
Closed to new entrants but still available to some:
- Up to £243/month (basic rate) or £124/month (higher rate)
- Still reduces student loan repayments
- Compare with Tax-Free Childcare for best option
- Can only use if enrolled before April 2018
Best for: Existing members with younger children
Detailed Worked Example: Full Package
Let's see the combined effect of multiple salary sacrifice benefits:
📝 Sarah: £45,000 Salary, Plan 2 Loan
Without Salary Sacrifice:
Gross salary: £45,000
Income tax: £6,486
National Insurance: £4,260
Student loan (Plan 2): £1,487.70
Net take-home: £32,766.30
With Salary Sacrifice Package:
Pension sacrifice: £4,500 (10%)
Electric car: £4,800/year (£400/month)
Cycle to work: £1,200/year (spread over 12 months)
Effective salary: £34,500
New Deductions:
Income tax: £4,386 (saves £2,100)
National Insurance: £2,988 (saves £1,272)
Student loan: £542.70 (saves £945)
EV BIK tax: ~£180 (2% on £9k car value)
Total Annual Savings:
Tax saved: £2,100
NI saved: £1,272
SL saved: £945
Grand total: £4,317/year saved!
Plus Sarah now has: £4,500 extra in her pension, a new electric car (worth ~£35k), a new bike, and her employer saves NI too (may offer additional benefits).
When Salary Sacrifice Makes the Most Sense
✓ Ideal Candidates:
- You're above the student loan threshold
- Your employer offers matching pension contributions
- You were planning to buy the item anyway (car, bike, phone)
- You're a higher-rate taxpayer (bigger savings)
- You expect your loan to be written off (reducing payments = win)
- You want to reduce your effective marginal tax rate
⚠️ Be Careful If:
- It would take you below National Minimum Wage
- You're planning maternity/paternity leave soon (affects statutory pay)
- You need maximum mortgage borrowing (lenders see lower salary)
- You're not sure about your job security
- You don't actually need the benefit being offered
- It would significantly reduce death-in-service benefits
Important: Impact on Other Things
💡Mortgage Applications
Lenders see your post-sacrifice salary as your income. A £45,000 salary with £10,000 sacrifice appears as £35,000 to mortgage providers. This can significantly affect how much you can borrow. Consider timing of salary sacrifice vs mortgage applications.
❌Statutory Pay (Maternity/Paternity/Sick)
Statutory Maternity Pay, Paternity Pay, and Sick Pay are calculated on your post-sacrifice salary. If you're planning to start a family, this could mean hundreds of pounds less in statutory pay. Some employers top up to full pay anyway, check your policy.
ℹ️Death in Service & Life Insurance
Many employer life insurance policies pay a multiple of salary (e.g., 4x). If you sacrifice £10,000, your death-in-service payout could be £40,000 lower. Check if your employer calculates this on pre- or post-sacrifice salary.
📝Pension Lifetime Allowance
With the pension lifetime allowance now abolished (from April 2024), this is less of a concern. However, if you're a very high earner, be aware of the Annual Allowance (£60,000 or tapered for high earners) as salary sacrifice pension contributions count toward this.
Plan-Specific Impact
| Plan | Threshold | Rate | Sacrifice Impact |
|---|---|---|---|
| Plan 1 | £26,065 | 9% | Every £1 sacrificed saves 9p on SL |
| Plan 2 | £28,470 | 9% | Every £1 sacrificed saves 9p on SL |
| Plan 4 | £31,395 | 9% | Every £1 sacrificed saves 9p on SL |
| Plan 5 | £25,000 | 9% | Every £1 sacrificed saves 9p on SL |
| Postgraduate | £21,000 | 6% | Every £1 sacrificed saves 6p on PG loan |
| Combined | Both apply | 15% | Where both plans apply to the same pound of income you save 15p on that pound (otherwise only the applicable plan applies) |
✅Double Win for Combined Loans
If you have both an undergraduate and postgraduate loan, salary sacrifice is extra powerful. You save 9% + 6% = 15% in student loan repayments on every pound sacrificed above both thresholds, plus tax and NI!
How to Set Up Salary Sacrifice
Check What's Available
Ask HR or check your employee benefits portal. Common options include pension sacrifice, cycle scheme, electric cars, and tech schemes.
Run the Numbers
Calculate your current take-home vs post-sacrifice. Remember to factor in what you'd otherwise spend on the benefit (car payments, bike purchase, etc.).
Consider the Trade-offs
Think about mortgage applications, statutory pay, and commitment periods. Electric car schemes typically lock you in for 2-4 years.
Complete the Paperwork
This usually involves signing a variation to your employment contract. Your official salary changes in your contract and on payslips.
Verify Your Payslip
After the first month, check your payslip to confirm the sacrifice is applied correctly and your student loan deduction has reduced.
Calculate Your Take-Home Pay
See how different salary sacrifice amounts would affect your student loan repayments and overall take-home pay.
Key Takeaways
Salary sacrifice legally reduces the income used to calculate student loan repayments
Typical combined savings are ≈37–63% depending on your tax band, NIC position and whether both UG & PG loans apply, see the examples in this guide
Pension salary sacrifice is usually the best option, especially with employer matching
Electric car schemes offer huge savings due to low 2% BIK tax on EVs
Be aware of impacts on mortgages, statutory pay, and death-in-service benefits
If you have both UG and PG loans, salary sacrifice saves 15% in SL repayments alone
Always run the numbers for your specific situation before committing
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Learn more →Multiple Jobs & Student Loans
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Learn more →Salary Impact Calculator
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Learn more →Combined Loan Calculator
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Learn more →