Salary Sacrifice vs Relief at Source, Which Saves More?

The Key Difference

The fundamental distinction between salary sacrifice and relief at source (or net pay arrangement) is National Insurance. Under salary sacrifice, your gross salary is formally reduced, income tax and employee NI are both calculated on the lower figure. You save tax and NI on every pound sacrificed. Under relief at source or net pay arrangement, your gross salary is unchanged, you pay NI on the full salary and only receive tax relief on the pension contribution. No NI saving arises.

For most employed people who have access to salary sacrifice, this makes salary sacrifice strictly more efficient than RaS or NPA for pension contributions. The NI saving is not trivial: at the main employee rate of 8%, a £5,000 salary sacrifice saves £400 in employee NI in addition to the income tax saving. Over a working lifetime at that contribution level, this amounts to substantial additional pension contributions at no extra cost to the employee.

The NI Saving in Salary Sacrifice

Employee NI for 2026/27 is 8% on earnings between the primary threshold (£12,570) and the upper earnings limit (£50,270), and 2% on earnings above the upper limit. A salary sacrifice of £5,000 for someone earning £35,000 saves 8% × £5,000 = £400 in employee NI and 20% × £5,000 = £1,000 in income tax, a total personal saving of £1,400, compared to a £1,000 saving under a RaS or NPA pension contribution.

Employers save 15% secondary NI on the sacrificed amount. On a £5,000 sacrifice, the employer saves £750. Many employers share this saving back into the employee's pension, known as NI matching or passthrough. Where available, this can add a further £375–£750 to the pension contribution at no cost to the employee, making salary sacrifice with employer NI passthrough markedly more valuable than any other contribution method.

When Relief at Source May Be Preferable

There are specific situations where RaS or NPA is more appropriate than salary sacrifice despite the NI cost. Student loan repayments under Plans 1, 2, 4 and 5 are calculated on gross employment income above the relevant threshold. Under salary sacrifice, the sacrificed salary is removed from the gross pay figure, reducing student loan repayments. This may or may not be desirable depending on whether the borrower is on track to repay the full loan before the write-off date. For those who will repay in full, reducing repayments extends the repayment period and increases total interest, a worse outcome.

Benefits in kind and certain employment rights are sometimes calculated on contractual salary. Income protection insurance, death-in-service cover, enhanced redundancy payments and statutory maternity pay may all be based on contractual salary rather than gross pay. Salary sacrifice reduces contractual salary, potentially reducing these benefits. If your employer calculates these benefits on the post-sacrifice figure, you need to weigh the NI saving against the reduction in insurance cover or SMP. Check your employment contract carefully.

Practical Guidance on Which to Choose

For most employees with access to salary sacrifice: choose salary sacrifice. The NI saving alone justifies it for the vast majority of workers, and the employer NI passthrough (where available) adds further value. The exceptions, student loan edge cases, SMP calculations near threshold, affect a minority of workers and should be modelled individually.

For self-employed and company directors who cannot use salary sacrifice: use a SIPP under relief at source. Ensure you file Self Assessment to claim higher-rate additional relief if your income is above £50,270. Company directors can also use employer pension contributions paid directly from the company, which provide the equivalent of salary sacrifice efficiency, the company pays into the pension instead of paying a taxable salary or dividend.