Pension salary sacrifice explained: how it saves you tax and National Insurance
Salary sacrifice is one of the simplest ways to make your pension contributions go further. You agree to give up part of your salary, and your employer pays that amount straight into your pension instead. Because the money never counts as pay, you don't pay income tax or National Insurance on it.
A worked example
Take someone earning £40,000 who puts 5% (£2,000) into their pension.
With salary sacrifice, their salary for tax purposes becomes £38,000. Their take-home pay drops by just £1,440 a year, yet £2,000 goes into their pension. The other £560 is tax and National Insurance they no longer pay.
For a higher rate taxpayer the saving is bigger. Someone on £60,000 sacrificing £3,000 sees their take-home pay fall by only £1,740, because that slice of their salary would have been taxed at 40% plus 2% National Insurance.
How it differs from a normal pension contribution
All workplace pension contributions get income tax relief. What makes salary sacrifice different is the National Insurance saving, worth 8% for most basic rate taxpayers and 2% above £50,270. Your employer also saves its own National Insurance, and some employers add part or all of that saving to your pension.
The catches
Your salary on paper goes down. That can affect things worked out from your salary, such as mortgage applications, some life cover, and statutory pay like maternity pay. Many employers use your pre-sacrifice salary for their own benefits, but check.
You can't go below the minimum wage. Your pay after the sacrifice must still meet the National Minimum Wage.
It's harder to change quickly. Most schemes only let you change the amount at set times or after a life event.
The 2029 change
From 6 April 2029, only the first £2,000 a year sacrificed into a pension will be free of National Insurance. You'll still get full income tax relief on everything you put in, and employer contributions made outside salary sacrifice aren't affected. If you sacrifice less than £2,000 a year, nothing changes for you.
Using it to manage tax thresholds
Because salary sacrifice reduces your taxable pay, it's often used to stay below £50,270 (the higher rate), £60,000 (the Child Benefit charge) or £100,000 (where you start losing your personal allowance). See the 60% tax trap for how much that last one can save.
See your own numbers
The take-home pay calculator treats pension contributions as salary sacrifice, so you can try different percentages and see exactly how your take-home pay changes. Salary sacrifice can also be used for an electric car, which we cover in is EV salary sacrifice worth it?