Guides / Salary Sacrifice
Salary Sacrifice Pension
How It Works & How It Saves You National Insurance
Salary sacrifice is one of the most tax-efficient ways to save for retirement in the UK. Unlike a standard pension contribution, it reduces both income tax AND National Insurance — for you and often your employer.
Enable salary sacrifice in Settings to see your NI saving instantly.
Model salary sacrifice in the calculator →
Salary sacrifice — also called salary exchange — is an arrangement where you agree to give up part of your gross salary and your employer pays the equivalent amount directly into your pension. Because the contribution comes out before income tax and National Insurance are calculated, you reduce both your tax and NI bill. For a basic rate taxpayer contributing £2,000 per year this way, the combined saving is typically around £560 compared to contributing from net pay.
What Is Salary Sacrifice?
Salary sacrifice — also called salary exchange — is an agreement between you and your employer to reduce your contractual gross salary by a set amount, with that amount paid directly into your pension by your employer instead.
Because your gross salary is genuinely reduced, you are not taxed on the sacrificed amount. You pay no income tax and no National Insurance on the money going into your pension. This makes it considerably more efficient than making pension contributions from your net pay.
Your employer also pays less employer National Insurance (13.8%) on your reduced salary. Some employers pass this saving on to employees as an additional pension contribution — it is worth asking your HR or payroll team.
Salary Sacrifice vs Relief at Source
There are two main ways pension contributions get tax relief in the UK:
•
Salary sacrifice: Your gross salary is reduced before tax and NI are calculated. You save both income tax and National Insurance on the contribution.
•
Relief at source: You contribute from your net pay. The pension provider claims 20% basic rate tax back from HMRC and adds it to your pot. Higher rate taxpayers claim the additional 20% through Self Assessment. But you still pay NI on the full salary — there is no NI saving.
The key difference: salary sacrifice saves NI; relief at source does not. For a basic rate taxpayer contributing £1,000/year, that is an extra £80 saved (8% NI). For a higher rate taxpayer, it is £20 (2% NI above £50,270) — though the tax saving is the same either way.
A Worked Example
Here is a concrete comparison of a £40,000 salary with a 5% pension contribution, both via salary sacrifice and relief at source.
Relief at source — £40,000 salary, 5% pension
Gross salary: £40,000
NI: (£40,000 − £12,570) × 8% = £2,194
Income tax: ~£5,486
Pension contribution from net pay: £40,000 × 5% = £2,000 (provider claims £500 tax relief)
Take-home: £40,000 − £5,486 − £2,194 − £2,000 = £30,320/yr
Salary sacrifice — £40,000 salary, 5% pension
Sacrificed gross: £40,000 × 5% = £2,000 → straight to pension
Adjusted gross: £38,000
NI: (£38,000 − £12,570) × 8% = £2,034 (saving £160)
Income tax: ~£5,086 (saving £400)
Take-home: £38,000 − £5,086 − £2,034 = £30,880/yr (£560 more per year)
The salary sacrifice arrangement results in the same £2,000 going into the pension but delivers £560 more take-home pay per year — purely from the NI and tax savings. The pension pot receives the same amount in both cases.
Why Salary Sacrifice Works Out Better
The NI saving is the crucial difference. When you contribute via relief at source, your employer still calculates NI on your full gross salary. With salary sacrifice, your gross is genuinely lower, so:
•
You pay 8% less NI on the sacrificed amount (up to the £50,270 upper earnings limit)
•
You pay 2% less NI on amounts above the upper earnings limit
•
Your employer pays 13.8% less employer NI — some employers share this saving with employees
The income tax saving is identical for both methods — relief at source is specifically designed to give the same tax outcome. The NI saving is where salary sacrifice wins.
If your employer passes on their 13.8% employer NI saving, a £2,000 sacrifice could add an extra £276 to your pension on top of your own saving. Ask your employer if they offer this.
Things to Consider
Salary sacrifice is almost always the better choice for employed people with a workplace pension — but there are a few things to keep in mind:
•
Mortgage applications: Lenders look at your contractual gross salary. A lower gross could affect affordability calculations, though many lenders now understand salary sacrifice and add it back.
•
Life insurance and sick pay: Some employer benefits are calculated as a multiple of contractual salary. Check whether your employer uses the pre- or post-sacrifice figure.
•
National Minimum Wage: Your sacrificed salary cannot take your pay below the National Minimum Wage.
•
Annual allowance: Total pension contributions (employer + employee) cannot exceed £60,000 per year (2025/26) or 100% of earnings.
Frequently Asked Questions
What is salary sacrifice?
Salary sacrifice (or salary exchange) is an arrangement where you agree to give up part of your gross salary in exchange for a non-cash benefit from your employer — most commonly an increased pension contribution. Because the sacrifice reduces your contractual gross pay, you pay no income tax or National Insurance on the sacrificed amount.
How much National Insurance can I save with salary sacrifice?
Employees pay 8% NI on earnings between £12,570 and £50,270 and 2% above £50,270. If you sacrifice £1,000 into your pension and your income is within the 8% NI band, you save £80 in NI per year in addition to any income tax saving.
Is salary sacrifice better than relief at source?
For most employed people, yes. With salary sacrifice you save NI (8% or 2%) on top of income tax, whereas with relief at source you only get tax relief — not NI relief. The difference is small for lower earners but meaningful at higher income levels.
Does salary sacrifice affect my State Pension?
Salary sacrifice reduces your contractual gross salary, which could reduce State Pension entitlement if your earnings drop below the Lower Earnings Limit (£6,396 in 2025/26). In practice this is very rarely an issue unless your salary is already low.
Can I put all my salary into a salary sacrifice pension?
The annual pension allowance for 2025/26 is £60,000 (or 100% of earnings if lower). Salary sacrifice contributions — including your employer's — count towards this limit. You also cannot sacrifice your salary below the National Minimum Wage.
Select 'Salary Sacrifice' as your pension type in Settings and watch your take-home change.
Try salary sacrifice in the calculator →