Salary sacrifice (also called salary exchange) is the most tax-efficient way for employed people in the UK to contribute to a pension. By redirecting part of your salary into your pension before tax is calculated, you avoid both Income Tax and National Insurance — meaning the true cost to your take-home pay is significantly less than the amount going into your pension. Yet many employees still use standard contributions and miss out on this extra saving.
How Salary Sacrifice Works
Under salary sacrifice, you and your employer formally agree to reduce your contractual salary by a set amount. Your employer then pays this amount directly into your pension as an employer contribution. Because your salary is reduced before any deductions:
- Income Tax is calculated on the lower salary — you pay less tax.
- National Insurance is calculated on the lower salary — you pay less NI.
- Your employer also pays less employer NI (13.8%) on the lower salary.
How Much Can You Save? Real Examples
For a basic rate taxpayer (earning £30,000/year) making a £200/month salary sacrifice pension contribution:
- £200 goes into pension each month.
- Income Tax saving: £200 × 20% = £40.
- Employee NI saving: £200 × 8% = £16.
- Net cost from take-home pay: £200 − £40 − £16 = £144/month.
- Effective cost rate: 72p per £1 going into pension.
For a higher rate taxpayer (earning £60,000/year) making a £500/month salary sacrifice:
- £500 goes into pension each month.
- Income Tax saving: £500 × 40% = £200.
- Employee NI saving: £500 × 2% = £10 (above UEL, so only 2%).
- Net cost from take-home pay: £500 − £200 − £10 = £290/month.
- Effective cost rate: 58p per £1 going into pension.
Employer NI Savings — and How to Get Them
Salary sacrifice also saves your employer 13.8% employer NI on the portion of salary sacrificed. Many employers pass all or part of this saving on to employees as extra pension contributions. This is essentially free money — worth asking your HR or payroll team whether your employer does this. On a £200/month sacrifice, the employer saves £27.60/month in NI — some employers add this entire amount to your pension on top of the regular contribution.
Salary Sacrifice vs Standard Pension Relief — What Is the Difference?
| Standard Contribution | Salary Sacrifice | |
|---|---|---|
| Income Tax relief | Yes | Yes |
| Employee NI saving | No | Yes |
| Employer NI saving | No | Yes (13.8%) |
| Gross salary reduced | No | Yes |
| Impact on maternity pay / benefits | None | Can reduce statutory pay |
Things to Watch Out For
- Statutory pay: Statutory maternity pay, sick pay, and redundancy pay are calculated on your actual salary — reduced by salary sacrifice. If you plan to take extended leave, consider this before increasing salary sacrifice significantly.
- Mortgage affordability: Some lenders assess affordability on your contracted gross salary. Salary sacrifice can reduce this figure, affecting how much you can borrow. Add back salary sacrifice amounts when calculating affordability, and discuss with a mortgage broker before major changes.
- State Pension qualifying years: If salary sacrifice reduces your earnings below the Lower Earnings Limit (£6,396/year in 2025/26), you may not get a qualifying NI year. Uncommon for typical salaries but worth checking at low pay levels.
- Benefits-in-kind interaction: Salary sacrifice can interact with other company benefits. Your employer's HR team can advise on how it affects specific benefits at your company.
How to Set Up Salary Sacrifice
- Check your employer offers it. Not all workplaces operate salary sacrifice — ask HR or your payroll team.
- Decide on your contribution amount. Use the Salary Calculator to see the take-home impact of different contribution levels.
- Complete a salary sacrifice agreement. This is a formal amendment to your employment contract specifying the new reduced salary and additional employer pension contribution.
- Your next payslip should reflect the change. Your gross salary will show as reduced; the pension section will show the larger employer contribution.
The Annual Pension Allowance
The Annual Allowance for pension contributions in 2025/26 is £60,000 (or 100% of your annual earnings if lower). This covers all contributions — employee, employer, and salary sacrifice combined. If you earn over £200,000, the tapered annual allowance may reduce your limit. Exceeding the allowance results in an Annual Allowance charge from HMRC, so check your position if contributions are high.