Salary sacrifice is one of the most tax-efficient ways to contribute to your pension in the UK. Rather than making a pension contribution from your net pay, your employer reduces your gross salary by the contribution amount and pays it directly into your pension. This reduces both your income tax and your National Insurance, making each pound in your pension go further than with a standard contribution.
How salary sacrifice works
Under a salary sacrifice arrangement, you and your employer agree to reduce your gross contractual salary by a set amount. Your employer then pays that amount — plus often their own NI saving — into your pension. Because your reported gross salary is lower, HMRC calculates your income tax and NI on the reduced figure.
For example, if you earn £50,000 and sacrifice £5,000 into your pension, you pay income tax and NI on £45,000 instead of £50,000. The total saving depends on your marginal tax rate. At the Basic Rate (20% tax + 8% NI), you save approximately 28p in tax and NI for every £1 sacrificed. At the Higher Rate (40% tax + 2% NI), you save approximately 42p per £1.
The tax savings in detail
With salary sacrifice you benefit from:
- Income tax relief at your marginal rate (20%, 40%, or 45%)
- Employee NI saving at 8% (between the Primary Threshold and Upper Earnings Limit) or 2% (above UEL)
- Employer NI saving — your employer saves 15% on the sacrificed amount; many employers pass some or all of this saving on to your pension
Use the salary sacrifice calculator to see exactly how much you would save at your salary.
The £100K trap and salary sacrifice
For earners between £100,000 and £125,140, salary sacrifice is particularly powerful. The £100K tax trap creates an effective 60% marginal rate in this range because the Personal Allowance is being tapered away. Salary sacrifice reduces your adjusted net income, which can restore your Personal Allowance and eliminate the 60% rate. For every £2 sacrificed in this range, you effectively get about £1.24 back in combined tax and NI relief.
Limitations and things to watch out for
- National Living Wage. Your employer cannot reduce your cash salary below the National Living Wage through salary sacrifice. For 2026/27, the NLW is £12.21/hour for workers aged 21 and over.
- Effect on benefits. A lower reported salary can reduce entitlements linked to your gross pay, such as mortgage borrowing capacity (some lenders use your gross contracted salary), life insurance multiples, and state benefits linked to NI contributions. It should not normally affect your State Pension entitlement, but check with your employer.
- Annual allowance. Total contributions to your pension (employee + employer) must not exceed your annual allowance (£60,000 for 2026/27, or 100% of your earnings if lower). If you exceed it, a tax charge applies.
Standard pension contributions vs salary sacrifice
If your employer does not offer salary sacrifice, you can still make personal pension contributions and receive Basic Rate tax relief at source (the pension provider adds 20% to your contribution on your behalf). Higher and Additional Rate taxpayers can claim additional relief through Self Assessment. However, personal contributions do not reduce your NI, so they are less efficient than salary sacrifice for the same gross contribution.
See the salary sacrifice calculator to model your saving, or use the main income tax calculator to compare different pension contribution types side by side.