Pensions and Tax Relief / Lesson 6 of 8
Salary sacrifice
The same contribution, costing you less, because National Insurance never sees it.
The short answer
- ✓ Sacrifice avoids National Insurance as well as income tax on the contribution
- ✓ Your employer saves NI too, and may add it to your pension
- ✓ Gross salary is genuinely lower, which affects borrowing and statutory pay
- ✓ The NI saving is largest below the upper earnings limit
How it works
You contractually give up part of your salary and your employer pays the equivalent into your pension. Because your gross salary is genuinely lower, neither income tax nor National Insurance is charged on that slice.
£3,000 into the pension, basic-rate employee
ORDINARY (relief at source)
Income tax relieved yes
National Insurance at 8% still paid
SACRIFICE
Income tax relieved yes
National Insurance not charged at all
Employer also saves 15% employer NI
Same amount in the pension, less taken from you.Many employers pass some or all of their own NI saving into the pension as well, which makes the arrangement better again. Whether yours does is worth asking.
What to watch
| Consideration | Effect |
|---|---|
| Your gross salary is genuinely lower | Mortgage borrowing may be assessed on the reduced figure |
| Statutory payments | Maternity and some other statutory pay are based on reduced earnings |
| Death in service and income protection | Often linked to salary, so check the definition used |
| The national minimum wage | Sacrifice cannot take pay below it |
| Reversing it | Usually only at set points or on a life event |
Where it is worth most
National Insurance falls to 2% above the upper earnings limit, so the NI saving from sacrifice is largest for people earning between the primary threshold and that limit. Above it, the NI saving is much smaller, though the income tax relief is unaffected.
The bit HMRC does not spell out
Salary sacrifice reduces your gross salary, and gross salary is what many other calculations look at. That cuts both ways.
Helpfully, it can bring you under thresholds such as the personal allowance taper or the High Income Child Benefit Charge, which the next lesson covers. Unhelpfully, a mortgage lender assessing affordability sees the lower figure, and so does statutory maternity pay.
Neither is a reason to avoid it. Both are reasons to time it deliberately rather than setting it up in the month before a mortgage application.
General tax information, not financial advice.
Common mistakes
- Setting it up just before a mortgage application. Lenders see the reduced salary.
- Ignoring statutory pay effects. Maternity pay is based on reduced earnings.
- Assuming you can reverse it any time. Usually only at set points.
- Not asking whether the employer shares its NI saving. Many do.
Try it on your own numbers
This is the same calculator as the full tool page, using 2026/27 rates.
Salary sacrifice
Sacrificing salary into a pension cuts your Income Tax and National Insurance, so the real cost to you is less than the amount that lands in your pot.
Lands in your pension
for a real cost of just
- You sacrifice
- Take-home before
- Take-home after
- Income Tax saved
- National Insurance saved
- Employer NI added to pot
- Real cost to you
Every £1 in your pot costs you
cost per £1 in pension
effective relief
Estimate for the tax year. Assumes a workplace pension under a salary sacrifice arrangement.
Part of your salary sits in the £100,000–£125,140 band where the Personal Allowance is withdrawn, creating an effective 60% tax rate. Sacrificing into a pension is an especially efficient way to claw that allowance back.
Sacrificing this much takes part of your pay below the National Insurance / Income Tax thresholds, so the tax-and-NI saving on the last slice is smaller.
Pension pot vs real cost
As you sacrifice more of your salary, the gap between what lands in your pot and what it actually costs you widens.
Compare saved scenarios
| Scenario | In pension | Real cost | Saved | |
|---|---|---|---|---|
Key takeaways
- ✓ Sacrifice avoids National Insurance as well as income tax on the contribution
- ✓ Your employer saves NI too, and may add it to your pension
- ✓ Gross salary is genuinely lower, which affects borrowing and statutory pay
- ✓ The NI saving is largest below the upper earnings limit
Check you have got it
3 quick questions. No score is kept, and you can change your mind.
1. What does salary sacrifice save that an ordinary contribution does not?
2. Why time salary sacrifice carefully around a mortgage application?
3. Where is the National Insurance saving from sacrifice largest?
Sources
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