Salary sacrifice (also called salary exchange) is an arrangement where you agree to reduce your gross salary in exchange for a non-cash benefit from your employer — most commonly, additional pension contributions.
Instead of receiving £1,000 in salary and then choosing to put it in a pension, your employer simply pays £1,000 directly into your pension and you never receive that £1,000 as earnings. Because you never received it as salary, you never pay income tax or National Insurance on it.
This is different from a standard personal pension contribution (also called "relief at source"), where you contribute from post-tax income and HMRC reimburses the basic-rate tax — but not the National Insurance.
When you make a salary sacrifice pension contribution, you save:
No other pension contribution method saves NI. This is the core advantage of salary sacrifice over other pension contribution routes — ordinary relief-at-source contributions save Income Tax only.
For a basic-rate taxpayer, the combined tax and NI saving on each £1 of salary sacrifice is:
Annual contribution: £1,750 (5% of £35,000)
Income tax saved: £350 (20%)
NI saved: £140 (8%)
Total annual saving: £490
Monthly take-home reduction: just £105 (not £146)
For a higher-rate taxpayer, contributions that bring earnings down into the basic rate band save at different rates. Contributions made on earnings above £50,270 save:
Annual contribution: £7,000 (10% of £70,000)
All £7,000 falls in the higher rate band — there is £19,730 of earnings above £50,270, far more headroom than the contribution needs
Total income tax saved: ~£2,800 (40%)
NI saved: £140 (2% on all £7,000)
Total annual saving: ~£2,940
Monthly take-home reduction: ~£338 (not £583)
If your income is between £100,000 and £125,140, salary sacrifice becomes extraordinarily powerful. In this range, the personal allowance is withdrawn at £1 for every £2 of income over £100,000 — creating a marginal Income Tax rate of 60% across the whole of that range.
For every £1,000 you contribute via salary sacrifice on income in this range:
At £110,000 the personal allowance has already fallen to £7,570. Sacrificing £10,000 to bring adjusted net income to £100,000 restores £5,000 of allowance, worth £2,000 in Income Tax, on top of £4,000 of ordinary 40% relief on the contribution itself — £6,000 of Income Tax saved in total, or 60p per £1. The full £12,570 allowance is only restored by reducing adjusted net income from £125,140 to £100,000, which is a £25,140 contribution.
Why this band matters: between £100,000 and £125,140, each £1 sacrificed reduces Income Tax by 60p and employee National Insurance by 2p, because the contribution also restores Personal Allowance. On a £110,000 salary, sacrificing £10,000 reduces take-home pay by £3,800 — Income Tax and National Insurance fall by £6,200 — so £10,000 reaches the pension at an effective personal cost of £3,800, or 38p per £1. That is a reduction in tax, not an investment return: what the pension is eventually worth depends on how it is invested. Salary sacrifice needs your employer to offer it and a change to your employment contract, the tax effect depends on your own circumstances and the annual allowance, and pension money is not normally accessible before age 55.
Employers also save National Insurance on salary sacrifice contributions — currently 15% on earnings above the secondary threshold (£5,000). This means your employer saves money too when you sacrifice salary.
Many employers pass some or all of their NI saving on to employees as additional pension contributions. This is known as an "NI pass-through" or "enhanced matching." It is worth asking your HR department whether your employer does this — it is essentially free additional pension money.
Salary sacrifice has a few downsides to be aware of:
Enter your salary and pension contribution to see exactly how much your take-home changes.
Take-Home Pay Calculator →Source. Statutory figures on this page are checked against GOV.UK: Rates and thresholds for employers 2026 to 2027. Last checked 2 September 2026; figures apply to the 2026/27 tax year unless stated otherwise.