Salary sacrifice pensions explained

Salary sacrifice is an arrangement where you exchange some of your salary for another benefit.  

These benefits could be many different things, from childcare vouchers to electric vehicles - what’s available to you will depend on your employer and the scheme it’s opted into.  

One of the most common uses of salary sacrifice across the UK are for pension contributions. We explain how this works, and what you need to know below.  

What does salary sacrifice for your pension mean? 

When you set-up a salary sacrifice arrangement, you’ll ask your employer to pay some of your salary into your pension instead.  

This will come from your gross pay – the money you receive before anything is deducted, like tax or student loans.  

That means on paper you’ll receive a lower salary, but you will pay less in income tax and national insurance than you normally would.  

A salary sacrifice is normally beneficial for your employer too. That’s because they pay national insurance based on your salary. If it’s lower, they pay less – and some companies pass these savings onto you.  

How does a salary sacrifice pension work?

To understand how salary sacrifice works, and how it can be used to pay less tax, consider this example:  

Sam is a basic rate taxpayer earning £40,000 in the 2026/27 tax year with a personal allowance of £12,570. She wants to put £4,000  into her pension.  

This is how her finances will shape up if she decides to make her contributions without salary sacrifice: 

All figures in this table have been rounded up to the nearest pound.  

She wants to save £4,000 into her pension this year, so this is what her salary will look like after making those contributions from her take-home pay:  

Employee pension contribution is paid net and when paid into the pension plan the tax relief is claimed. 

Instead, Sam speaks to her employer and they agree to make these contributions via salary sacrifice. This is how her finances look now:    

All figures in this table have been rounded up to the nearest pound. 

In this example, Sam will save £320 a year, or about £27 a month, by making these contributions via salary sacrifice.  

What are the rules for salary sacrifice pensions? 

Salary sacrifice is a formal arrangement between you and your employer. There’s no obligation for an employer to offer a salary sacrifice pension but, as there are benefits for employers as well as employees, many do offer it. 

To set up an arrangement, you need to sign a salary sacrifice contract with your employer. This sets out how much of your salary you are giving up and what you will receive in return. 



A salary sacrifice arrangement should also allow you to make changes when a major lifestyle event occurs, such as getting married, starting a family, or adjusting your pension after a divorce and pension sharing order. Without one of these events in the background, switching terms whenever you want could risk invalidating any benefits of salary sacrifice. 

You are free to end the arrangement whenever you like, but your employer will need to amend your contract to reflect your revised salary.

What are the advantages of a salary sacrifice pension? 

• Your pension pot potentially grows faster – or at a lower cost to you.
• You reduce the amount you pay in income tax and national insurance and you may also benefit from your employer’s national insurance savings.
• Reducing your salary could increase your entitlement to certain state benefits such as tax credits.
• Salary sacrifice offers some tax planning opportunities. You may be able to regain child benefit entitlement if your income can be reduced below £60,000; or reclaim your personal allowance if you can sacrifice salary to get below £100,000.

What are the disadvantages of a salary sacrifice pension? 

• Your take-home pay may be reduced although, by using salary sacrifice to cover existing pension contributions, you could maintain or even increase your take-home pay 
• It could affect how much you can borrow on a mortgage or loan – but do check with your HR department as many lenders now accept your notional full salary rather than the reduced one. 
• It could affect earnings-related benefits such as maternity and paternity pay, income protection and life insurance. 
• A lower salary could also affect percentage-based pension contributions and pay rises. Ask your employer whether they will use your notional full salary or the reduced one for these calculations.
  
  

How much salary should I sacrifice for my pension? 

How much you sacrifice is up to you. The more you pay into your pension, the faster it will grow, but there are few things to consider before taking the plunge:

• Annual allowance – this is the lower of £60,000 and 100% of your income. Unless you are taking advantage of carry forward to pay in more, this is the most that can go into your pension in the current tax year before you have to pay tax.
• Your take-home pay – the tax and national insurance savings can make it tempting but don’t sacrifice salary you may need now. Also be aware how a lower salary might affect other benefits, although this can sometimes work in your favour.
• National minimum wage – a salary sacrifice arrangement cannot reduce your earnings below the national minimum wage rates. Your employer should have procedures in place to prevent this. 
  
  

How do I work out the effect on tax and national insurance contributions?

This will vary depending on your tax position and your employer’s policy on redirecting national insurance contributions saved as a result of salary sacrifice. 

Speak to your HR department or accountant to find out how a salary sacrifice pension could work for you.

Is there a catch? 

Salary sacrifice is a great way to boost your pension but it is possible that the rules could change in the future. Some of the tax advantages that come with salary sacrifice used to be available across a broader range of benefits, until restrictions were introduced in 2017. 

The government may target salary sacrifice again to help it balance the books, but salary sacrifice pensions could be safe as they help with another government objective – encouraging more retirement savings.