Most employees think of pension contributions as coming out of their net pay. Salary sacrifice works differently — your employer reduces your gross salary by the contribution amount, and pays it directly into your pension. Because the contribution is made before tax and NI are applied, you save on both. Your employer also saves on their NI contributions, and some pass that saving on to you.
How it works
The mechanics of salary sacrifice
| Method | Contribution route | Tax relief | NI saving |
|---|---|---|---|
| Salary sacrifice | Employer pays gross salary minus contribution into pension | ✓ Automatic at source | ✓ Employee and employer both save |
| Relief at source | Employee pays from net, provider claims 20% tax back | ✓ HMRC adds 20% (higher rate via self-assessment) | ✓ None — NI already paid |
| Net pay arrangement | Contribution deducted before tax, not NI | ✓ Tax relief automatic | ✓ None — NI already paid |
The numbers
What salary sacrifice actually saves you
For a basic-rate taxpayer contributing £200/month via salary sacrifice instead of relief at source, the saving is around £24/month in NI (12% on £200). Over a year that is £288 of additional money in your pocket for no change in pension contribution. For a higher-rate taxpayer the income tax saving is also greater because the sacrifice reduces income in the 40% band.
Your employer saves 13.8% NI on your sacrificed salary. Some employers pass all or part of this saving directly into your pension — which can add another 5–10% on top of your contributions for free. Check your employer's policy. If they offer this and you are not salary sacrificing, you are leaving money on the table.
The trade-offs
When salary sacrifice is not straightforward
Salary sacrifice formally reduces your gross salary, which is the figure lenders use for affordability calculations. A large sacrifice can reduce your borrowing capacity. If you are planning to apply for a mortgage soon, model the impact on your maximum loan before increasing your sacrifice level.
Some state benefits — including statutory maternity, paternity, and sick pay — are calculated from your contractual salary. If salary sacrifice brings your contractual pay below the lower earnings limit (£6,396 in 2024/25), it can affect your entitlement. Check before sacrificing if you are close to this threshold.
Salary sacrifice cannot reduce take-home pay below the National Living Wage. Employers are responsible for ensuring this, but it means sacrifice is not available at all salary levels.
Employer match
Always capture the full employer match first
Before optimising salary sacrifice levels, ensure you are contributing enough to receive your employer's maximum match. Employer contributions are free money — a 50–100% immediate return — and are typically paid regardless of whether you use salary sacrifice or another method. The NI saving from salary sacrifice is valuable, but it comes after the employer match in priority.
Unlike pension contributions made from net pay, salary sacrifice is a formal change to your employment contract. Your employer must agree to it, and the arrangement must be documented. Most large employers have a standard scheme — but smaller employers may not offer it or may not be set up for it. Confirm with your payroll or HR team before assuming it is available.
Is salary sacrifice the right move for your situation?
The answer depends on your salary, marginal tax rate, employer match, and whether you are planning a mortgage application. Ask Franky to run the numbers for your situation.
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