Written by PensionTaxReliefCalculator Editorial. Reviewed against official UK guidance. Methodology
Salary sacrifice saves income tax and National Insurance. This is the most tax-efficient way to contribute to a pension if your employer offers it, but there are edge cases to understand before signing up.
Salary sacrifice, sometimes called salary exchange, is a formal contractual arrangement between you and your employer. You agree to give up part of your gross salary, and your employer pays an equivalent amount (or more) into your pension as an employer contribution. The legal distinction matters enormously: instead of you contributing from your pay, your employer is making the contribution. This means the sacrificed amount is never part of your taxable earnings and never attracts National Insurance.
The arrangement must be documented in a revised contract of employment. You cannot simply declare that you want to salary sacrifice on a one-off basis, it requires a formal variation, though many large employers now operate this as the default pension contribution method. Auto-enrolment minimum contributions (8% total) can be delivered via salary sacrifice. Once set up, the effect is seamless: your payslip will show a reduced gross salary with a correspondingly larger employer pension contribution.
For 2026/27, the employer NI rate is 15% (raised from 13.8% by the October 2024 Budget, effective April 2025). This higher rate increases the employer's incentive to offer salary sacrifice, since the NI saving per pound sacrificed is now larger. The secondary threshold (the earnings level above which employer NI is paid) is £5,000 per year, so employer NI saving applies from relatively modest salary levels.
For a basic-rate employed taxpayer earning £35,000 who sacrifices £3,000 per year into pension: income tax saving (20%): £600. Employee NI saving (8%, since earnings above £12,570): £240. Total personal saving: £840 per year compared to a traditional pension contribution of the same gross amount. Under a conventional relief-at-source arrangement, the same £3,000 gross contribution would only deliver £600 in income tax relief, no NI saving.
For a higher-rate taxpayer earning £60,000 who sacrifices £10,000: income tax saving (40%): £4,000. Employee NI saving: earnings above £50,270 attract only 2% NI, below it 8%. On a £10,000 sacrifice starting at £60,000: £9,730 × 2% + £270 × 8% ≈ £195 + £22 = approximately £217 employee NI saving. Total personal saving: £4,217. Via a SIPP under RaS, the same person would receive £4,000 income tax relief (after SA claim) but no NI saving.
Additionally, the employer saves 15% NI on the sacrificed amount. On a £10,000 sacrifice, the employer saves £1,500. Many employers reinvest part or all of this saving back into the employee's pension, a practice known as employer NI passthrough. Where this applies (ask your HR department), the total pension pot benefit of a £10,000 salary sacrifice can include £10,000 in pension plus £750–£1,500 additional employer NI passthrough, at a personal cost of approximately £5,783 (£10,000 − £4,217 personal saving).
Claire earns £45,000 and joins her employer's salary sacrifice pension scheme. She decides to sacrifice £3,600 per year (£300/month). Her gross salary reduces from £45,000 to £41,400. Effects: income tax reduction: 20% × £3,600 = £720/year. Employee NI reduction: 8% × £3,600 = £288/year. Total personal take-home improvement: £720 + £288 = £1,008/year (compared to contributing the same amount from post-tax pay). Employer NI saving: 15% × £3,600 = £540/year. If the employer passes on 50% of this: £270 extra pension contribution at no cost to Claire.
Under a personal pension (relief at source), Claire contributing £2,880 net would result in £3,600 gross in her pension, and her only saving is the £720 income tax relief on the contribution (she already paid NI on the salary). Under salary sacrifice, she achieves the same £3,600 gross pension contribution at a net personal cost of £2,592 (£3,600 − £1,008 saving), £288 cheaper per year. Over 30 years of working, that £288/year additional saving (invested at 5% real return) would add approximately £19,000 to her retirement pot.
Salary sacrifice reduces your contractual salary, the gross salary written in your employment contract. This matters for several real-world calculations. First, mortgage affordability: lenders assess affordability on contractual salary. If your sacrifice reduces gross salary from £50,000 to £43,000, your borrowing capacity may be assessed on the lower figure. Some lenders are familiar with salary sacrifice and will add back the pension contribution; others will not. Check with your lender before maximising your sacrifice if you are planning to mortgage.
Second, statutory maternity pay (SMP) and enhanced maternity pay are typically calculated on average earnings in the reference period, which may be your reduced contractual salary. If you are planning to take maternity leave, consider timing large sacrifice elections carefully or ask your HR department how the company calculates SMP. Third, death-in-service insurance and group income protection, often expressed as multiples of salary, may be calculated on the post-sacrifice contractual salary. If your scheme defines 'salary' as contractual gross pay, a significant sacrifice could meaningfully reduce your cover.
Fourth, student loan repayments. Plans 1, 2, 4 and 5 are calculated on total income above the relevant threshold. Under salary sacrifice, the sacrificed amount is excluded from income, reducing your repayments. Whether this is beneficial depends on your loan balance and whether you expect to repay in full before the write-off date. If you will repay in full regardless, lower repayments mean higher interest accrual, a worse outcome. If you are unlikely to repay in full (most Plan 2 borrowers starting after 2012), lower repayments may actually be advantageous.
Setting up salary sacrifice requires formal documentation, your employer must issue a revised contract or letter of variation confirming the new terms. Once set up, you can typically change contribution levels at your employer's next permitted window, usually annually or at life events (new job, marriage, birth of child, etc.). The employer sets the frequency of changes permitted; some allow monthly adjustment, others only annual.
If you are a new employee, check whether salary sacrifice is the default pension arrangement or whether you need to opt in. Under auto-enrolment, you will be enrolled in the pension, but the specific mechanism (salary sacrifice, net pay or relief at source) depends on the employer's chosen scheme. Ask HR how contributions are structured and whether NI passthrough is available. The answers to these questions can make a meaningful difference to your retirement outcome.
No. Salary sacrifice requires an employer-employee relationship. Sole traders and partners cannot use it. Limited company directors who draw a salary from their company can theoretically use salary sacrifice if the company operates a workplace pension, but most use employer pension contributions directly from the company instead, which achieves similar efficiency.
Only if the sacrifice reduces your earnings below the lower earnings limit (£6,396 in 2026/27). Above this level, NI credits still accrue and state pension entitlement is unaffected. Most working adults contributing via salary sacrifice will be well above this threshold.
Statutory redundancy pay is calculated on weekly earnings, which is based on actual gross pay. If your contractual salary was reduced by salary sacrifice, redundancy pay is based on the lower figure. Enhanced redundancy pay may follow the same calculation or may use a different basis, check your employment contract. This is a relatively minor consideration for most people, but worth understanding.
No. Employers are not required to pass on their NI saving to employees. Many do, but the amount varies, some pass on 50%, some 100%, some nothing. Ask your HR department or check your pension scheme documentation. The passthrough is typically added as an additional employer pension contribution.