What is salary sacrifice for pension?

Salary sacrifice (also called salary exchange) is an arrangement where you give up part of your gross salary in exchange for your employer paying an equivalent amount directly into your pension. Because the sacrifice happens before income tax and National Insurance are calculated, you pay less of both, so each pound in your pension pot costs you less than a pound from your take-home pay.

How much do I save with salary sacrifice?

A basic-rate (20%) taxpayer saves 20% income tax plus 8% NI on the sacrificed amount, so every £1 of pension contribution costs roughly 72p. A higher-rate (40%) taxpayer saves 40% tax plus 2% NI (above £50,270), so every £1 costs around 58p. The exact saving depends on your salary band.

Does my employer benefit too?

Yes. Your employer also pays less Class 1 Employer NI (15% in 2026/27) on the lower salary. Some employers pass this saving back to you as an extra pension contribution, sometimes called an 'NI match'. Always ask your employer whether they do this, as it can significantly boost your pension pot at no extra cost.

Are there any downsides to salary sacrifice?

There are a few to be aware of. (1) Your lower contracted salary may affect mortgage affordability assessments, so check with your lender. (2) State benefits linked to earnings, such as Statutory Maternity Pay and the State Pension, are based on your NIable pay. If salary sacrifice reduces your earnings below the Lower Earnings Limit (£6,396), this could affect some entitlements. (3) Some employers do not offer salary sacrifice arrangements.

How does salary sacrifice differ from personal pension contributions?

With a personal (relief-at-source) pension contribution, you pay from net pay and HMRC adds back the basic-rate tax. If you're a higher-rate taxpayer you claim the extra relief through your tax return. Salary sacrifice is simpler (the saving is automatic at source) and also saves NI, which personal contributions don't. For most employees salary sacrifice is the more tax-efficient option.

Is there a limit on how much I can sacrifice?

The Annual Allowance for pension contributions is £60,000 per tax year (2026/27). This includes employer contributions. Unused allowance from the previous three years can sometimes be carried forward. You also cannot sacrifice your salary below the National Minimum Wage (£12.21/hour from April 2025 for workers 21 and over). Most employers set their own maximum sacrifice limits well within these boundaries.

Retirement & Pensions

Salary Sacrifice Calculator

See how much income tax and National Insurance you save by paying into your pension via salary sacrifice, and what your pension contributions actually cost you.

Updated April 2026

Your details

Annual gross salary

Pension sacrifice

= £2,250 / year into your pension

Employer passes NI saving to my pension Some employers add their NI saving as extra pension contribution

Your results

£630 Saved by Sacrificing 5% of Salary

Annual saving from salary sacrifice

£630

£450 income tax · £180 NI · £0.72 real cost per £1 pension

Pension contribution: £2,250
Take-home pay (with sacrifice): £34,300
Real cost of pension: £1,620

Breakdown

Annual figures · 2026/27 income tax and NI rates

	Without Sacrifice	With Sacrifice	Difference
Gross salary	£45,000	£42,750	−£2,250
Income Tax	£6,486	£6,036	−£450
Employee NI	£2,594	£2,414	−£180
Take-home pay	£35,920	£34,300	−£1,620
Pension contribution	None	£2,250	+£2,250
Employer NI	£6,000	£5,663	−£338

Your pension receives £2,250 but your take-home only falls by £1,620 saving you £630 per year in tax & NI.

Related calculators

Income Tax Calculator National Insurance ISA Calculator

Related guides

How Pension Salary Sacrifice Works

Frequently asked questions

Salary Sacrifice Guide

How pension salary sacrifice works

Salary sacrifice (sometimes called salary exchange) is an agreement between you and your employer to reduce your contractual gross pay in exchange for a non-cash benefit — most commonly a pension contribution. Because your taxable income falls, you pay less income tax and National Insurance, making it one of the most tax-efficient ways to save for retirement in the UK.

The tax and NI saving

When you sacrifice salary, you save income tax and National Insurance on the amount given up. A basic-rate taxpayer (20%) sacrificing £1,000 saves £200 in income tax and £80 in employee NI (8% in 2025/26), meaning the pension contribution of £1,000 only costs £720 in take-home pay. For a higher-rate taxpayer (40%) the saving is even greater: £400 tax + £20 NI at 2% above £50,270 means the net cost is just £580. Many employers also pass on their 13.8% employer NI saving as an additional pension contribution — worth checking with your HR department.

What can be sacrificed

Pension contributions are by far the most common use of salary sacrifice and give the most significant tax benefit. Other benefits that can be delivered this way include cycle-to-work schemes (up to £1,000 of cycling equipment, or higher for e-bikes), ultra-low emission vehicles (salary sacrifice EVs have a very low Benefit in Kind rate of 3%), and employer-run workplace nursery places. Childcare voucher schemes closed to new entrants in October 2018, but existing members can continue. Tax-Free Childcare — a separate scheme via HMRC — is not salary sacrifice but is worth considering alongside it.

Impact on State Pension and benefits

Salary sacrifice reduces the earnings figure used by your employer for payroll purposes. For State Pension, what matters is whether your 'qualifying earnings' remain above the Lower Earnings Limit (£6,396 in 2025/26) — the vast majority of people are well above this even after sacrifice, so there is no impact on NI credits. However, it may affect mortgage affordability assessments if a lender uses your reduced contractual salary. It can also reduce entitlement to some earnings-related benefits such as statutory maternity pay or sick pay, since these are calculated on your reduced salary. If these are a concern, you can choose a lower sacrifice amount or temporarily opt out.

When salary sacrifice may not be worthwhile

Salary sacrifice cannot reduce your pay below the National Living Wage (£12.21/hour in 2025/26), so low-paid workers may not be able to participate at all. If you earn between £12,570 and £12,621 there is a small band where sacrificing loses you the income tax saving without a meaningful NI gain. If you are applying for a mortgage imminently, discuss with your employer whether they can provide a letter confirming your actual package value. Finally, near retirement when your marginal rate may drop, withdrawing cash from a pension can attract tax, so the balance of contribution versus withdrawal tax should be modelled carefully.

Annual allowance limits

Total pension contributions (from you, your employer, and any salary sacrifice) are subject to the annual allowance — £60,000 in 2025/26, or 100% of your UK earnings if lower. If you have accessed flexible pension benefits, the Money Purchase Annual Allowance (MPAA) of £10,000 applies. Very high earners above £260,000 in 'adjusted income' face a tapered annual allowance. Going over the allowance triggers a tax charge, so it is worth tracking total contributions if your employer contribution is generous.

Sources & methodology

Built and maintained by Tim, a personal finance enthusiast (not a financial adviser). Last reviewed April 2026. Rates and thresholds come from official UK government publications.

HMRC: Income Tax rates and allowances · Official rates, bands and thresholds
GOV.UK: National Insurance rates · Employee and employer NI rates
Scottish Government: Income Tax · Scottish income tax rates and bands
The Pensions Regulator: Auto-enrolment · Qualifying earnings and contribution thresholds
GOV.UK: Tax on your private pension · Tax relief rules and annual allowances
HMRC: Pension schemes · Salary sacrifice and pension scheme types

Figures are estimates only. This is not financial or tax advice. For help with your specific situation, speak to HMRC or a qualified adviser.