Salary sacrifice explained

How swapping part of your salary for a pension contribution can cut both your Income Tax and your National Insurance — and the trade-offs worth knowing first.

Why it saves you more than a normal pension contribution

The key difference is National Insurance. With a standard "relief at source" pension, your contribution comes out of your take-home pay and you get basic-rate tax relief added back — but you've already paid National Insurance on that money. With salary sacrifice, the contribution comes off your gross pay before both Income Tax and National Insurance are worked out, so you save on both.

For a basic-rate taxpayer that's 20% Income Tax plus 8% National Insurance — so £100 sacrificed effectively costs you around £72 of take-home pay, while £100 lands in your pension. Employers often also pass on some or all of the employer National Insurance they save, boosting your pension further.

A quick example

Say you earn £40,000 and sacrifice 5% (£2,000) into your pension. Your taxable salary becomes £38,000, so you pay Income Tax and National Insurance on £2,000 less. You lose about £1,440 of take-home pay, but £2,000 (plus any employer top-up) goes into your pension — a meaningful head start on retirement for a modest hit to your monthly pay.

The trade-offs to watch

Salary sacrifice lowers your headline salary, and that can matter in a few places. Mortgage lenders may assess you on the reduced figure. Some employers base life cover, sick pay or redundancy on the sacrificed salary. You generally can't dip into the money until you can access your pension. And you can't sacrifice below the National Minimum Wage. For most people the tax and National Insurance savings outweigh these, but it's worth checking how your employer's scheme is set up.

General information only, not financial advice. Whether salary sacrifice suits you depends on your circumstances — consider speaking to a regulated adviser, and see MoneyHelper for free guidance.