Salary Sacrifice Pension — How It Works and How Much You Save
Salary sacrifice is one of the most effective ways to save for retirement in the UK. By giving up part of your gross salary in exchange for pension contributions, you reduce your income tax and National Insurance — often significantly. Here's exactly how it works.
What is salary sacrifice?
Normally, you pay into your pension from your net pay — money that's already been taxed. With salary sacrifice, your employer reduces your gross salary by the pension contribution amount before tax is calculated. Because your "official" salary is lower, you pay less income tax and less National Insurance.
How much can you save?
The saving depends on your tax band. Here's a comparison for a £5,000 annual pension contribution:
| Tax band | Normal contribution | Salary sacrifice | Extra saving |
|---|---|---|---|
| Basic rate (20%) | £4,000 cost (£1,000 relief) | £3,600 cost | £400/yr extra |
| Higher rate (40%) | £3,000 cost (£2,000 relief) | £2,600 cost | £400/yr extra |
| Additional rate (45%) | £2,750 cost (£2,250 relief) | £2,350 cost | £400/yr extra |
The NI saving is roughly 8% for basic rate taxpayers and 2% for earnings above £50,270. Over a career, this can add tens of thousands to your retirement pot.
Your employer saves too
Employer NI (now 15% from April 2026) is calculated on gross salary. When you sacrifice salary, your employer's NI bill falls. Many employers pass some or all of this saving back to you as an enhanced contribution — it's worth asking.
What are the limits?
You can contribute up to £60,000 per year to pensions (the Annual Allowance), or 100% of your earnings if lower. Salary sacrifice counts as employer contributions for pension purposes, which is advantageous. However, your salary cannot be sacrificed below the National Minimum Wage.
Does it affect anything else?
Salary sacrifice reduces your "official" salary for some purposes: mortgage affordability calculations, life cover based on salary multiples, and state benefits that are earnings-related. It usually doesn't affect most employees, but it's worth checking with your employer if you're about to apply for a mortgage.
Should you use salary sacrifice?
For most employees with access to it, salary sacrifice is almost always the most tax-efficient way to save into a pension. The only reason not to use it would be if it would push your salary below a threshold that matters to you (mortgage, benefits, NMW).
See your salary sacrifice savings
Enter your salary and pension percentage to see exactly how much you save.
See how salary sacrifice affects your take-home pay
Use our salary calculator to model pension contributions and see your exact net pay.