What does salary sacrifice mean?
Salary sacrifice means agreeing to swap part of your contractual pay for a benefit. For pensions, your pay goes down and your employer pays the same amount into your pension. Because tax and National Insurance are worked out on the lower pay, you pay less of both.
How does a salary sacrifice pension work?
Your employer changes your contract so your salary is lower, then pays the difference into your pension as an employer contribution. You need to agree to the change, and you normally can't swap back and forth whenever you like.
Salary sacrifice pension example
Take a £40,000 salary with £3,000 sacrificed. Your new salary is £37,000, so you pay £600 less Income Tax and £240 less National Insurance. Your pension gets the full £3,000, and your take-home falls by only £2,160.
Three ways your pension can be taken from your pay
Most calculators only model one of these. Your employer's scheme decides which one you're in, and the difference can be worth hundreds of pounds a year on the same contribution.
| Method | Income Tax | National Insurance | Student loan |
|---|---|---|---|
| Salary sacrifice | Saved | Saved | Can fall |
| Net pay | Saved | Still paid | No change |
| Relief at source | 20% added to pot | Still paid | No change |
Salary sacrifice
Salary sacrifice lowers your contractual pay, and your employer pays the difference into your pension. You save Income Tax and National Insurance, and it can lower student loan repayments too. Your employer saves their 15% NI as well.
Net pay arrangement pension
A net pay arrangement takes the contribution out before Income Tax is worked out, but you still pay NI on it. You get full tax relief straight away, but a non-taxpayer gets none.
What is a relief at source pension?
A relief at source pension takes the contribution from your after-tax pay, and your provider adds 20%. Higher-rate payers have to claim the rest from HMRC. People who aren't paying tax still get the 20%.
What £100 in your pension really costs
Here's the cost to your own pocket of getting £100 into your pension, once relief is counted. For relief at source we've included any extra relief you'd claim from HMRC.
| Salary | Salary sacrifice | Net pay | Relief at source |
|---|---|---|---|
| £30,000 | £72 | £80 | £80 |
| £45,000 | £72 | £80 | £80 |
| £60,000 | £58 | £60 | £60 |
| £80,000 | £58 | £60 | £60 |
| £110,000 | £38 | £40 | £40 |
| £150,000 | £53 | £55 | £55 |
| Salary | Salary sacrifice | Net pay | Relief at source |
|---|---|---|---|
| £30,000 | £72 | £80 | £80 |
| £45,000 | £50 | £58 | £58 |
| £60,000 | £56 | £58 | £58 |
| £80,000 | £53 | £55 | £55 |
| £110,000 | £31 | £33 | £33 |
| £150,000 | £50 | £52 | £52 |
The tables show something worth knowing before you switch. A basic-rate payer saves about £8 for every £100 by using salary sacrifice instead of the other two methods, because they avoid 8% National Insurance. Above the upper earnings limit that NI rate is 2%, so a higher-rate payer saves only about £2. If you pay higher-rate tax, the method matters less than you might expect, and it's worth comparing any side effects first.
Advantages of salary sacrifice
- Less tax and NI. You save National Insurance as well as Income Tax, which the other two methods don't do.
- Lower student loan repayments. They're based on your pay after the sacrifice.
- A possible employer top-up. Your employer saves 15% NI, and some add part of that to your pension.
- Help in the tax traps. A lower income can protect your personal allowance and your Child Benefit.
The 60% tax trap above £100,000
Between £100,000 and £125,140 you lose £1 of personal allowance for every £2 you earn, which creates an effective Income Tax rate of 60%. A pension contribution in that band saves tax and wins allowance back. Salary sacrifice there costs about £38 for each £100 in your pot.
Salary sacrifice and the Child Benefit charge
Between £60,000 and £80,000 of adjusted net income you pay back 1% of your Child Benefit for each £200 over £60,000. Pension contributions reduce adjusted net income, so they can reduce the charge or remove it. Enter your Child Benefit in the calculator and it will tell you how much you'd need to contribute.
Disadvantages of a salary sacrifice pension
A lower contractual salary has side effects, and the calculator flags the ones it can check.
- Minimum wage. A sacrifice can't take your cash pay below the National Minimum Wage.
- Statutory pay. Maternity, paternity and sick pay can be lower, because they're based on your earnings.
- State Pension record. If earnings fall below the Lower Earnings Limit of £6,708, you can lose qualifying years.
- Borrowing. A mortgage lender may base what you can borrow on the lower salary.
- Salary-linked benefits. Life cover and pay rises may follow your lower figure, unless your employer uses a notional salary.
The salary sacrifice cap from April 2029
These pension salary sacrifice changes were announced at Budget 2025. From 6 April 2029, only the first £2,000 a year of pension contributions made through salary sacrifice will stay free of National Insurance. Anything above that will attract employee and employer NI as normal. Income Tax relief doesn't change, and the details are still to be set in secondary legislation.
Turn on the 2029 preview chip to see the effect on you at today's rates. We've built it as a preview because the final rules aren't published, so treat the result as a guide to scale.
Is salary sacrifice worth it?
For most people paying tax, yes. The tables above show it's the cheapest way to save. It's less clear-cut in a few situations.
- You don't pay Income Tax. Relief at source still adds 20% to your pot, while salary sacrifice only saves you NI.
- You're close to the minimum wage. Your employer can't let a sacrifice take your cash pay below it.
- You're applying for a mortgage soon. A lower salary can reduce what you can borrow, so check with your lender first.
- You're expecting a baby. Statutory maternity pay depends on your earnings, so ask your employer how the scheme treats it.
Salary sacrifice questions
Is my pension relief at source, net pay or salary sacrifice?
Start with your payslip. With salary sacrifice, your basic pay is lower than your contract salary and there's often no employee pension deduction. With net pay, a deduction appears and your taxable pay is lower than your gross pay. With relief at source, a deduction appears but your taxable pay stays the same. Your scheme booklet or payroll team can confirm it.
Does salary sacrifice affect my pension?
Your pot receives the amount you sacrifice, so it doesn't lose out. If your employer's contribution is a percentage of your pay, check whether they use your lower salary or a notional salary. Very low earnings can also affect your State Pension record.
Does a salary sacrifice pension reduce student loan repayments?
Yes. Repayments are based on your pay after the sacrifice. On a Plan 2 loan, sacrificing £3,000 of pay above the threshold lowers your repayments by £270 a year.
Does a salary sacrifice pension affect maternity leave pay?
It can. Statutory maternity pay depends on your earnings, so a sacrifice can lower it, and earnings below the Lower Earnings Limit can remove it. Ask your employer how the scheme works during your leave.
Does a salary sacrifice pension affect a mortgage?
It can, because a lender may look at your lower salary. If you're about to apply, ask the lender how they treat salary sacrifice.
Salary sacrifice vs net pay pension: which is better?
Both give you Income Tax relief straight away, but salary sacrifice saves National Insurance too. That usually makes it cheaper for the same contribution.
Is salary sacrifice better than relief at source?
For most taxpayers, yes, because it saves National Insurance too. Relief at source can be better if you don't pay Income Tax, because you still get the 20% added to your pot.
What's the difference between a net pay arrangement and relief at source?
With a net pay arrangement, the contribution leaves your pay before Income Tax, so you get all your relief straight away. With relief at source, you pay from taxed income, your provider adds 20%, and higher-rate payers claim the rest from HMRC.
How does higher rate pension tax relief work?
Salary sacrifice and net pay give you relief at your top rate automatically. With relief at source you get 20% in your pot, then claim the extra through HMRC. The comparison above shows that amount as "To reclaim from HMRC".
Is there a limit on how much I can sacrifice?
A sacrifice can't take your cash pay below the National Minimum Wage. Total pension contributions, including your employer's, also count towards the £60,000 annual allowance. You may be able to carry forward unused allowance from the last 3 tax years.
Can I choose salary sacrifice?
Only if your employer offers it. It needs a change to your contract, and you normally can't swap back and forth whenever you like.
Does this tool cover cycle or car schemes?
Not yet. It's built for pension contributions, because the tax rules for other schemes differ.
Sources
Checked on 4 November 2026 against the 2026/27 tax year.
- GOV.UK: Salary sacrifice for employers
- GOV.UK: Salary sacrifice reform for pension contributions from 6 April 2029
- GOV.UK: Tax on your private pension contributions
- GOV.UK: Pension annual allowance
- GOV.UK: High Income Child Benefit Charge
- GOV.UK: Adjusted net income
- GOV.UK: Rates and thresholds for employers 2026 to 2027
- GOV.UK: Income Tax rates and allowances
- GOV.UK: National Minimum Wage and National Living Wage rates