How does salary sacrifice work for a pension?

You agree to a lower salary and your employer pays the difference into your pension. The sacrificed pay is never taxed and carries no National Insurance, so your take-home falls by less than the amount sacrificed while the full sum — often plus the employer’s NI saving — goes into the pension.

Is salary sacrifice better than a normal pension contribution?

For an employee it is usually more efficient, because it saves employee National Insurance as well as income tax — a relief-at-source contribution saves income tax only. The employer may also add its own NI saving. The trade-offs are the effect on salary-linked benefits and, from April 2029, a planned cap on the NI relief.

Does salary sacrifice reduce my adjusted net income?

Yes. The sacrificed salary is removed from your income, so adjusted net income falls £1 for £1 — which can restore the personal allowance above £100,000, claw back child benefit between £60,000 and £80,000, and recover Tax-Free Childcare below £100,000.

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Salary sacrifice for pensions, explained

The employee gives up salary; the employer pays it into the pension. That saves income tax and National Insurance, the pension can pick up the employer’s NI saving too, and adjusted net income falls. A few catches come with it.

Based on SSCBA 1992 (National Insurance), ITA 2007 (adjusted net income) and FA 2004 (the annual allowance).

8 min read · Last reviewed 23 Jun 2026

Salary sacrifice is a contractual change: you agree to a lower salary, and in exchange your employer pays the difference into your pension as an employer contribution. The amount given up is never paid to you, so it is never taxed and never carries National Insurance — and that second part is the whole point. A personal pension contribution paid from your bank account gets income tax relief but no National Insurance relief. Salary sacrifice gets both.

What you actually save

On the salary you sacrifice you save income tax at your marginal rate and employee National Insurance — 8% in the band between the primary threshold and the upper earnings limit, 2% above it. So your take-home falls by less than the amount sacrificed, while the full amount goes into the pension.

Basic-rate employee · 2025/26 · £1,000 sacrificed · employer passes on its NI saving in full

Salary given up: £1,000.00
Income tax saved (20%): £200.00
Employee NI saved (8%): £80.00
Fall in take-home: £720.00
Employer NI saving added (15%): £150.00
Total into the pension: £1,150.00

£720 of take-home has bought £1,150 of pension — an effective uplift of about 160%. A relief-at-source contribution of the same £1,000 would have cost £800 (it saves the £200 tax but not the £80 NI) and, without an employer, put in only £1,000. The salary sacrifice calculator runs your own figures, including the Scottish bands.

The employer’s saving

Because your salary is lower, your employer’s secondary (employer) National Insurance falls too — 15% on the band above the £5,000 secondary threshold from 6 April 2025. Many employers add some or all of that saving to your pension; some keep it. Whether they pass it on is the single biggest variable in how good a given scheme is, which is why it has its own toggle in the calculator. (See salary sacrifice and National Insurance for the detail.)

SSCBA 1992 s.8 (employee) and s.9 (employer) ; gov.uk/national-insurance-rates-letters.

The hidden bonus: it lowers adjusted net income

Sacrifice reduces your adjusted net income, the figure behind several cliff edges. Between £100,000 and £125,140 it reinstates the personal allowance (an effective 60% saving — the £100k tax trap); between £60,000 and £80,000 it claws back the High Income Child Benefit Charge; and dropping below £100,000 restores Tax-Free Childcare and funded hours. For a high earner with children, this can be worth more than the headline tax-and-NI saving.

The catches

Three things to check. First, the annual allowance: the sacrifice is an employer contribution toward your £60,000 allowance, and — for arrangements set up on or after 9 July 2015 — it is added back to threshold income, so it does not help you escape the tapered annual allowance even though it does cut adjusted net income. Second, salary sacrifice cannot take your pay below the National Minimum or Living Wage. Third, it lowers the salary figure used for some benefits — death-in-service cover, statutory maternity and redundancy pay, and mortgage affordability. And, as with any pension, the money is locked away until at least age 55 (57 from 2028).

FA 2004 s.228ZA(5) and PTM057100 — the threshold-income add-back.

One more on the horizon: the 2025 Budget announced a cap on the NI relief from April 2029 — see salary sacrifice and the 2025 Budget.

Common questions

How does salary sacrifice work for a pension?: You agree to a lower salary and your employer pays the difference into your pension. The sacrificed pay is never taxed and carries no National Insurance, so your take-home falls by less than the amount sacrificed while the full sum — often plus the employer’s NI saving — goes into the pension.
Is salary sacrifice better than a normal pension contribution?: For an employee it is usually more efficient, because it saves employee National Insurance as well as income tax — a relief-at-source contribution saves income tax only. The employer may also add its own NI saving. The trade-offs are the effect on salary-linked benefits and, from April 2029, a planned cap on the NI relief.
Does salary sacrifice reduce my adjusted net income?: Yes. The sacrificed salary is removed from your income, so adjusted net income falls £1 for £1 — which can restore the personal allowance above £100,000, claw back child benefit between £60,000 and £80,000, and recover Tax-Free Childcare below £100,000.

Sources & grounding

Employee Class 1 NI: SSCBA 1992 s.8; gov.uk/national-insurance-rates-letters — 8% between the primary threshold (£12,570) and the upper earnings limit (£50,270), 2% above, for 2025-26 (unchanged for 2026-27 per gov.uk Rates and thresholds for employers 2026 to 2027).
Employer Class 1 secondary NI: SSCBA 1992 s.9; NICs (Secondary Class 1 Contributions) Act 2025 — 15% above the £5,000 secondary threshold from 6 April 2025 (13.8% / £9,100 in 2024-25). Unchanged for 2026-27 per gov.uk Rates and thresholds for employers 2026 to 2027.
Adjusted net income / personal-allowance taper: ITA 2007 s.35, s.58 — withdrawal of £1 per £2 over £100,000.
Annual allowance + the salary-sacrifice add-back to threshold income: FA 2004 s.228ZA(5); PTM057100 — arrangements on/after 9 July 2015 are added back to threshold income.
Worked figures computed by the engine’s salary-sacrifice scenario (app/calc-engine/income-tax/salary-sacrifice.ts), pinned in its test at zero-pence tolerance.

For planning and illustration purposes only. Verify all inputs against source documents. This explainer does not constitute financial or tax advice.