Salary Sacrifice and Pensions — Everything You Need to Know
Last updated 11/06/2026
Salary sacrifice is one of the most effective tax planning tools available to UK employees — and it requires no special expertise to use. Here is a complete guide to how it works, what you save, and what to watch out for.
What Is Salary Sacrifice?
Salary sacrifice (formally called a salary exchange) is a contractual agreement between you and your employer. Instead of receiving your full salary and then making pension contributions, your employer reduces your contractual gross pay by your contribution amount and pays that amount directly into your pension on your behalf.
The outcome looks identical — the same total goes into your pension. But because your gross pay is lower, you pay less income tax and National Insurance on it.
The Mechanics of the Tax Saving
Here is what happens to each £100 you sacrifice, compared to making the same contribution from net pay:
| Method | Cost to you (basic rate) | Cost to you (higher rate) |
|---|---|---|
| Salary sacrifice | £72 (saves 20% tax + 8% NI) | £52 (saves 40% tax + 2% NI above UEL, or 8% below) |
| Relief at source (RAS) | £80 (saves 20% tax only; NI paid) | £60 (saves 40% tax in total with SA claim; NI paid) |
| No pension contribution | £72 take-home on £100 earned (basic rate) | £58 take-home on £100 earned (higher rate) |
For a basic-rate taxpayer, salary sacrifice saves 8% more than relief at source because employee NI is avoided. On a 5% contribution from a £40,000 salary (£2,000/yr), the extra saving is approximately £160 per year in NI alone.
Employer NI Saving — and Employer Contributions
Salary sacrifice also saves your employer 15% in employer NI on the sacrificed amount. From April 2025, that is £300 saved on a £2,000 sacrifice. Many employers pass some or all of this back as an enhanced employer contribution:
- 50% NI pass-through: employer adds £150 extra to your pension (on £2,000 sacrifice)
- Full NI pass-through: employer adds the full £300 — effectively free pension money
Ask your HR or payroll team whether your employer operates an NI sharing scheme. It is one of the most valuable benefits available and is easy for employers to implement.
Worked Example: £45,000 Salary, 8% Contribution
| Item | Without sacrifice | With salary sacrifice (8%) |
|---|---|---|
| Gross salary | £45,000 | £41,400 |
| Pension (employee) | £3,600 (from net) | £3,600 (pre-tax) |
| Taxable income | £45,000 | £41,400 |
| Income tax | −£6,486 | −£5,766 |
| Employee NI | −£2,594 | −£2,306 |
| Net pension cost | −£2,880 (after 20% relief) | £0 |
| Take-home pay | £33,040 | £33,328 |
| In pension (total with 3% employer) | £3,600 + £1,350 = £4,950 | £3,600 + £1,350 = £4,950 |
Take-home is £288 higher with salary sacrifice — for the same total pension contribution.
Impact on Mortgage Applications
This is the most important drawback to understand. Your contractual salary is reduced by the sacrifice amount. Many mortgage lenders use your contractual salary to calculate maximum borrowing — some accept the gross sacrifice amount; others do not. Before increasing your salary sacrifice significantly, check with a mortgage broker if you plan to apply for a mortgage in the next 1–2 years.
Impact on Statutory Pay
Statutory Maternity Pay (SMP), Statutory Paternity Pay, Statutory Sick Pay and redundancy pay are all based on your normal weekly earnings, which uses your contracted pay (post-sacrifice) for some calculations. If your sacrifice is large, this could reduce your entitlement. Speak to HR before making any change during a period when you might claim statutory pay.
Death in Service and Life Cover
Employer-provided life assurance that pays a multiple of salary (e.g. four times salary) typically uses your contractual salary — the reduced figure. On a £50,000 salary with £5,000 sacrifice, the payout would be based on £45,000, not £50,000. Some employers guarantee the pre-sacrifice salary for this purpose — check your scheme rules.
Salary Sacrifice vs Other Pension Methods
| Feature | Salary sacrifice | Relief at source | Net pay arrangement |
|---|---|---|---|
| Tax relief | Automatic (via lower gross) | Provider claims basic rate; you claim higher rate via SA | Automatic at marginal rate |
| NI saving | Yes — both employee and employer | No | No |
| Non-taxpayers | No benefit below income tax threshold | 20% relief even if non-taxpayer | No benefit below income tax threshold |
| Mortgage impact | Reduces contractual salary | No impact | No impact |
Annual Allowance
The Annual Allowance for 2026/27 is £60,000 (or 100% of UK earnings). This counts total contributions including employer contributions. If you earn £40,000 and your employer matches contributions to make a total of 15% (£6,000), you have £54,000 of Annual Allowance remaining. You can carry forward unused allowance from the past three tax years.
Use our salary calculator to model exactly how salary sacrifice at different percentages affects your monthly take-home pay.