Workplace Pension Tax Relief 2026/27: Net Pay, Salary Sacrifice and Relief at Source

The three mechanisms: an overview

UK workplace pensions deliver income tax relief to members through one of three mechanisms: relief at source (RaS), net pay arrangement (NPA), or salary sacrifice. Each operates differently, produces the same gross pension outcome for basic-rate taxpayers, but diverges significantly for higher-rate and lower-income earners. Your employer chooses the mechanism, employees typically cannot select their preferred method within the same scheme, though some employers offer a choice.

It is also common for an employer to operate salary sacrifice for some contributions and NPA or RaS for others. For example, mandatory auto-enrolment contributions might be processed under NPA while additional voluntary contributions (AVCs) are handled separately. Understanding which method applies to each portion of your contributions is important for knowing what, if anything, you need to do via Self Assessment.

Relief at source: how it works

Under relief at source, your employer deducts your pension contribution from your post-tax pay. You contribute the net amount, and the pension provider claims 20% basic-rate relief directly from HMRC and adds it to your pension pot. This process is automatic, you do not need to take any action to receive the 20% top-up.

For basic-rate taxpayers: no further action required. The 20% relief claimed by the provider is the full entitlement. For higher-rate (40%) and additional-rate (45%) taxpayers: the provider has only claimed 20%, but your entitlement is greater. You must claim the additional 20% or 25% via Self Assessment or a PAYE tax code adjustment. A 40% taxpayer contributing £3,000 net to a RaS scheme receives £3,750 gross in their pension (provider adds £750). The further £750 they are entitled to (20% of £3,750) must be claimed separately.

An important quirk of relief at source: non-taxpayers and low earners below the personal allowance can still receive the 20% top-up on contributions up to £2,880 net (£3,600 gross) per year. This makes RaS generous for low-income earners, they receive a government top-up even though they pay no income tax. Under NPA, these earners would receive no top-up at all, as there is no tax to offset.

Net pay arrangement: the automatic method

Under a net pay arrangement, your pension contribution is deducted from your gross salary before income tax is calculated. Your employer's payroll software reduces your taxable income by the contribution amount, so income tax is charged on the lower figure. You automatically receive relief at your full marginal rate, 20% for basic rate, 40% for higher rate, 42% for Scottish higher rate, 45% for additional rate, without any Self Assessment claim.

Net pay is common in workplace defined benefit schemes, some large group personal pension schemes and master trust providers. For higher earners, NPA is simpler than RaS because there is no need to claim additional relief. The full 40% or 45% relief is delivered through payroll. For Scottish taxpayers, NPA is also preferable because Scottish intermediate (21%), higher (42%) and top (45%) rates are applied automatically without any SA adjustment.

The disadvantage of NPA for low earners: if you earn below the personal allowance, no income tax is calculated on your salary regardless of contributions, so no relief is available through the NPA mechanism. You pay the full contribution with no top-up. This is in contrast to RaS, where a 20% top-up applies regardless of tax status. From 2024/25, the government began providing a top-up for NPA scheme members below the basic-rate threshold, but the administration of this top-up has been inconsistent across employers.

Salary sacrifice: the NI advantage

Salary sacrifice is not technically a pension tax relief mechanism, it is a contractual arrangement where you agree to receive lower salary in exchange for higher employer pension contributions. The pension contribution goes in as an employer contribution, not an employee contribution. Because your salary is lower, you pay less income tax and National Insurance on it.

The key difference from NPA and RaS is the NI saving. Under salary sacrifice, both employee NI (8% main rate, 2% above upper earnings limit) and employer NI (15%) are reduced on the sacrificed amount. Under NPA and RaS, no NI saving arises, these are mechanisms for income tax relief only. For most employed workers, salary sacrifice is therefore the most efficient contribution method where it is available.

The practical difference: a basic-rate taxpayer contributing £300/month via salary sacrifice saves 20% income tax + 8% NI = 28% of the contribution, versus 20% under RaS or NPA. On £300/month, that is £84 monthly versus £60 monthly, a £24 per month difference, or £288 per year. Over a 25-year career at constant rates, the additional NI saving (invested at 5% real return) adds approximately £14,000 to the pension pot.

Auto-enrolment minimum contributions and employer matching

Under auto-enrolment, the minimum total contribution is 8% of qualifying earnings (between the lower earnings limit and upper earnings limit). The minimum split is 3% employer and 5% employee. Many employers contribute more than the minimum, and some offer enhanced matching where they increase their contribution if the employee increases theirs. Matching arrangements are usually structured as: employer contributes X% if employee contributes at least Y%.

Employer matching through salary sacrifice is the most compelling single improvement many employees can make to their pension provision. If your employer will match an additional 3% of salary if you sacrifice 3% more, the combined benefit, employer contribution + NI saving on your sacrifice, is worth well in excess of 3% of salary to you. Always contribute enough to capture the full employer match before considering whether to contribute more elsewhere (e.g. a personal SIPP).