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.
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)
Roughly £19,730 of contribution in higher rate band, £0 in basic rate
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 In this range, the personal allowance is withdrawn at £1 for every £2 of income over £100,000 — creating an effective marginal rate of 60%.
For every £1,000 you contribute via salary sacrifice on income in this range:
A salary of £110,000 contributing enough to bring adjusted net income below £100,000 can recover up to £5,028 in income tax just from restoring the personal allowance — on top of the 40% relief on the contribution itself.
Rule of thumb: If you earn between £100,000 and £125,140, salary sacrifice is the highest-return "investment" available to you — a guaranteed 60% return on pension contributions in this band, before any investment growth.
Employers also save National Insurance on salary sacrifice contributions — currently 13.8% on earnings above the secondary threshold (£9,100). 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.
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