Salary sacrifice for pensions, explained

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.

On these figures a £720 fall in take-home goes with £1,150 into the pension — about 160% of the take-home pay given up. 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 adjusted net income, the figure behind several cliff edges — the adjusted net income calculator works out the starting position. Between £100,000 and £125,140 the sacrifice reinstates the personal allowance (an effective 60% income-tax saving, priced by the £100k tax trap calculator); between £60,000 and £80,000 it cuts the High Income Child Benefit Charge (the High Income Child Benefit Charge calculator); and bringing adjusted net income to £100,000 or below can meet the Tax-Free Childcare and funded-hours income test, although the other eligibility rules still apply. For a high earner with children, these effects can exceed the headline tax-and-NI saving.

Salary sacrifice and pension tax relief

Salary sacrifice delivers pension tax relief at your full marginal rate with nothing to claim, because there is no relief to give: the sacrificed pay is simply never taxed. A relief-at-source contribution, by contrast, gets only the basic 20% added automatically — a 40% or 45% taxpayer has to recover the rest through self assessment or a tax-code adjustment (FA 2004 s.192(4)), and a missed claim is a missed saving. How the claim works, and why sacrifice sidesteps it, is set out in higher-rate pension tax relief: how it works and how to claim it.

The catches

Four 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: legislation now provides for a £2,000 annual cap on the NI relief from 6 April 2029, to be brought in by regulations — see salary sacrifice and the 2025 Budget.