If your employer offers salary sacrifice for pension contributions, it's almost certainly worth using — and most people don't realise how much they're leaving on the table by not doing so.
What is salary sacrifice?
Salary sacrifice is an agreement between you and your employer where you give up part of your gross salary in exchange for a benefit — most commonly a pension contribution. The key word is "gross": the sacrifice happens before income tax and National Insurance are calculated, not after.
This is different from how most personal pension contributions work. With a standard "relief at source" pension, your employer deducts the contribution from your net pay, and your pension provider claims basic rate tax relief (20%) from HMRC on your behalf. If you're a higher rate taxpayer, you claim the extra 20% back through self-assessment.
With salary sacrifice, the contribution never counts as your income in the first place. You don't pay income tax on it, and you don't pay National Insurance on it either. That NI saving is the part that makes salary sacrifice strictly better than relief at source for most people.
How much do you actually save?
The saving depends on your tax band. Here's a comparison for a £500/month pension contribution:
| Tax band | Relief at source saving | Salary sacrifice saving | Extra saving |
|---|---|---|---|
| Basic rate (20%) | £100/month (tax only) | £140/month (tax + NI) | £40/month |
| Higher rate (40%) | £200/month (tax only) | £240/month (tax + NI) | £40/month |
| Additional rate (45%) | £225/month (tax only) | £235/month (tax + NI) | £10/month |
The NI saving is 8% for basic and higher rate taxpayers (on earnings up to £50,270) and 2% above that. That's £40/month or £480/year extra in your pocket — for doing nothing differently except changing the mechanism by which the money reaches your pension.
Your employer saves too
When you sacrifice salary, your employer also avoids paying employer NI on the sacrificed amount — that's 15% for 2026/27. On a £6,000 annual sacrifice, the employer saves £900 in NI.
Many employers pass some or all of this saving back to you by adding it to your pension contribution. If yours does, the effective boost to your pension is even larger than the numbers above suggest. It's worth asking your HR department whether they offer an employer NI pass-through.
What salary sacrifice affects
Reducing your gross salary on paper has knock-on effects beyond tax and NI. Some are positive, some are worth knowing about:
Mortgage applications. Lenders look at your gross salary to determine how much you can borrow. A lower gross figure could reduce your borrowing capacity. If you're applying for a mortgage soon, consider pausing or reducing salary sacrifice temporarily. Some lenders will accept a letter from your employer confirming your pre-sacrifice salary.
State pension entitlement. Your post-sacrifice salary must remain above the lower earnings limit (£6,396 for 2026/27) to continue building state pension qualifying years. For most people this isn't an issue, but if you're working part-time and sacrificing aggressively, check this.
Statutory payments. Statutory maternity pay, statutory sick pay, and redundancy pay are calculated on your actual (post-sacrifice) salary. If you're planning to go on maternity leave, check how salary sacrifice affects your entitlement before committing.
Student loan repayments. Salary sacrifice reduces the income used for student loan calculations. If you're on Plan 2, the threshold is £27,295 — sacrificing enough to bring your income below this means your repayments pause. Whether this is desirable depends on your balance and how quickly you want to clear the loan.
Life insurance and income protection. If your employer provides these as a multiple of salary, check whether they use your pre-sacrifice or post-sacrifice figure. Most employers use pre-sacrifice, but it's worth confirming.
Salary sacrifice vs relief at source: a summary
| Salary sacrifice | Relief at source | |
|---|---|---|
| Income tax saving | Yes | Yes |
| Employee NI saving | Yes | No |
| Employer NI saving | Yes | No |
| Reduces gross salary on paper | Yes | No |
| Affects mortgage borrowing | Possibly | No |
| Affects statutory payments | Yes | No |
| Requires employer agreement | Yes | No |
| Available to everyone | No (employer must offer) | Yes |
For most employed people whose employer offers it, salary sacrifice is the better option. The main exceptions are if you're about to apply for a mortgage, about to go on maternity leave, or your post-sacrifice salary would fall below the NI lower earnings limit.
How to set it up
Salary sacrifice isn't something you can do unilaterally — it requires a formal agreement with your employer. The typical process is:
- Ask your HR or payroll department whether salary sacrifice for pension contributions is available
- Decide how much you want to sacrifice (as a fixed £ amount or % of salary per month)
- Sign the sacrifice agreement — this is a contractual change to your terms of employment
- Your payslip will show a lower gross salary and the sacrifice amount going to your pension
- You can usually change the amount once a year, or at "life events" (marriage, birth of a child, house purchase)
If your employer doesn't offer salary sacrifice, you can still contribute to a personal pension (SIPP) and claim tax relief through self-assessment — you just miss out on the NI saving.