Compares a salary sacrifice against paying into the same pension from taxed pay. The income tax relief is identical; the National Insurance is not, and that is the whole difference.
On the figures so far
Sacrificing £5,000 leaves you £1,400 a year better off, for the same money in the pension.
The gap is £1,400 — wide enough to be real, and one figure was assumed. To be surer: whether your employer passes back its own National Insurance saving — many do, and it is worth asking.
Refine it in 4 questions below.
The decision
Sacrificing £5,000 leaves you £1,400 a year better off, for the same money in the pension.
£1,400 better than from taxed pay, on the same figures.
Each of these has to be true. Where your answers settle it we have said so; where they cannot, the test is yours to check.
Your employer offers salary sacrifice. — we cannot tell from your answers
Not a tax rule — the practical gate
There is a written variation to your employment contract. — we cannot tell from your answers
HMRC EIM42750
The sacrifice does not take your pay below the National Minimum Wage. — we cannot tell from your answers
National Minimum Wage Act 1998
You are comfortable with a lower contractual salary. — we cannot tell from your answers
Not a tax rule — the real cost
The contribution is within your annual allowance. — met, on your answers
FA 2004 ss. 227–228
This is information, not tax or financial advice. It shows how the rules apply to the figures you entered — it does not know the rest of your circumstances. Worth checking with an accountant before you act.
Rates as at 6 April 2026 — the 2026/27 tax year.
The figures above are only as good as what sits behind them. These are the records HMRC would ask for.
| When | What | If you miss it |
|---|---|---|
| Before the pay period starts | The variation must be in place before the salary is earned. | A sacrifice agreed after the pay has been earned is not a sacrifice — it is a diversion of earnings, taxed in full. |
| Each pay period | The reduced salary must actually be paid. | An arrangement on paper that payroll does not follow is not effective. |
| 5 April | Contributions counted for this tax year. | Falls into the next year. Unused annual allowance carries forward three years; the NI saving does not carry anywhere. |
| Any lifestyle change | Most schemes let you change or stop the sacrifice. | Some only allow changes annually or on a life event. Check before committing to a large sacrifice. |
The two questions that matter: does the employer pass back its own National Insurance saving, and does it keep a notional salary for lending and benefits?
www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye
The sacrifice cannot take pay below the National Minimum Wage, and taking it below the National Insurance thresholds can affect entitlement to contributory benefits.
In writing, before the pay is earned. This is the step that makes it a sacrifice rather than a payment out of salary.
www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim42750
Gross pay should be lower by the sacrificed amount, and the pension contribution should show as the employer's, not yours. If it shows as your contribution, it is not a sacrifice.
All the relief is given by the lower salary. Putting a sacrificed contribution on a tax return claims it twice, which HMRC will correct.
Three situations, worked through. They use the same rules as the tool above, so you can check the arithmetic against a case near your own.
At the basic rate the income tax relief is identical either way, so the entire gain is the National Insurance — plus whatever the employer passes back.
Above the upper earnings limit the NI saving is only 2%, so the gain narrows — but sacrifice gives the higher-rate relief automatically rather than needing a claim most people never make.
The strongest case: sacrifice clears the personal allowance taper and the NI together, and none of it needs claiming back.
Every figure above comes from one of these. Where we have interpreted rather than calculated, the tool says so.
A salary sacrifice reduces contractual pay in exchange for a non-cash benefit; the reduced amount is never earnings.
Employer pension contributions are exempt from income tax and National Insurance for both parties.
Pension contributions are one of the benefits excluded from the optional remuneration arrangement rules, so the sacrifice keeps its advantage.
Employee National Insurance is 8% between the primary threshold and the upper earnings limit, and 2% above it.
Salary cannot be sacrificed below the National Minimum Wage.
For the pension, almost always — the income tax relief is the same and the National Insurance saving is extra. The reasons not to are non-tax: a lower contractual salary affects mortgage affordability, statutory pay and sometimes life cover.
Employee National Insurance drops from 8% to 2% above the upper earnings limit, so above about £50,270 the NI saving is only 2p in the pound. The income tax relief is unchanged — sacrifice just gives it automatically instead of by claim.
The employer saves its own NI on the sacrificed pay. Many schemes add some or all of that to your pension, which can be the largest single part of the benefit. It is always worth asking, and it is never automatic.
Only if the sacrifice takes your pay below the lower earnings limit, which would break a qualifying year. At normal salaries it does not, because qualifying years depend on earnings above that floor, not on the amount.
Yes, and it is usually the most efficient single sacrifice available — a bonus is taxed at your top rate and full NI. The agreement has to be in place before the bonus is earned, not after it is announced.
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