Question 1

What is salary sacrifice for pension?

Accepted Answer

Salary sacrifice (also called salary exchange) is an arrangement where you give up part of your gross salary in exchange for your employer paying an equivalent amount directly into your pension. Because the sacrifice happens before income tax and National Insurance are calculated, you pay less of both, so each pound in your pension pot costs you less than a pound from your take-home pay.

Question 2

How much do I save with salary sacrifice?

Accepted Answer

A basic-rate (20%) taxpayer saves 20% income tax plus 8% NI on the sacrificed amount, so every £1 of pension contribution costs roughly 72p. A higher-rate (40%) taxpayer saves 40% tax plus 2% NI (above £50,270), so every £1 costs around 58p. The exact saving depends on your salary band.

Question 3

Does my employer benefit too?

Accepted Answer

Yes. Your employer also pays less Class 1 Employer NI (15% in 2026/27) on the lower salary. Some employers pass this saving back to you as an extra pension contribution, sometimes called an 'NI match'. Always ask your employer whether they do this, as it can significantly boost your pension pot at no extra cost.

Question 4

Are there any downsides to salary sacrifice?

Accepted Answer

There are a few to be aware of. (1) Your lower contracted salary may affect mortgage affordability assessments, so check with your lender. (2) State benefits linked to earnings, such as Statutory Maternity Pay and the State Pension, are based on your NIable pay. If salary sacrifice reduces your earnings below the Lower Earnings Limit (£6,396), this could affect some entitlements. (3) Some employers do not offer salary sacrifice arrangements.

Question 5

How does salary sacrifice differ from personal pension contributions?

Accepted Answer

With a personal (relief-at-source) pension contribution, you pay from net pay and HMRC adds back the basic-rate tax. If you're a higher-rate taxpayer you claim the extra relief through your tax return. Salary sacrifice is simpler (the saving is automatic at source) and also saves NI, which personal contributions don't. For most employees salary sacrifice is the more tax-efficient option.

Question 6

Is there a limit on how much I can sacrifice?

Accepted Answer

The Annual Allowance for pension contributions is £60,000 per tax year (2026/27). This includes employer contributions. Unused allowance from the previous three years can sometimes be carried forward. You also cannot sacrifice your salary below the National Minimum Wage (£12.21/hour from April 2025 for workers 21 and over). Most employers set their own maximum sacrifice limits well within these boundaries.

	Without Sacrifice	With Sacrifice	Difference
Gross salary	£45,000	£42,750	−£2,250
Income Tax	£6,486	£6,036	−£450
Employee NI	£2,594	£2,414	−£180
Take-home pay	£35,920	£34,300	−£1,620
Pension contribution	None	£2,250	+£2,250
Employer NI	£6,000	£5,663	−£338

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