Salary Sacrifice: The Pay Trick Most Employees Are Missing
By TaxHelper Editorial
If your employer offers a salary sacrifice pension scheme and you are not using it — or not using enough of it — you are probably leaving free money on the table. Here is exactly how it works.
What Is Salary Sacrifice?
Salary sacrifice (also called salary exchange) is an agreement between you and your employer to reduce your gross pay in exchange for a non-cash benefit — most commonly pension contributions. Instead of earning £35,000 and then paying £1,750 (5%) into your pension from your net pay, your employer reduces your salary to £33,250 and pays £1,750 directly into your pension on your behalf.
The result looks the same on paper, but the tax treatment is completely different.
The Tax Saving
Normal pension contributions (relief at source) come from your post-tax, post-NI income. Salary sacrifice contributions come from your pre-tax, pre-NI income. That means on every £1 you put in via salary sacrifice:
- You save 20% income tax (basic rate) — or 40% if you are a higher-rate taxpayer
- You save 8% employee National Insurance (on earnings between £12,570 and £50,270)
That is a combined saving of 28% for a basic-rate taxpayer. To put £1,000 into your pension via salary sacrifice, it only costs you £720 out of pocket. Via normal contributions, it costs £800 (after basic-rate tax relief, but before NI).
The Employer NI Bonus
Your employer also saves National Insurance — 15% of your sacrifice amount (from April 2025). Many employers pass some or all of this saving back to you as a higher employer contribution. For example:
"We will contribute 3% into your pension, plus 50% of our NI saving if you salary sacrifice."
On a £2,000 annual sacrifice, the employer saves £300 in NI. If they pass 50% back, you get an extra £150 per year going into your pot — for free.
A Worked Example
Sarah earns £42,000 and wants to contribute 5% (£2,100/yr) to her pension.
| Relief at source | Salary sacrifice | |
|---|---|---|
| Gross salary | £42,000 | £39,900 |
| Income tax | −£5,886 | −£5,466 |
| Employee NI | −£2,354 | −£2,186 |
| Net pension cost | −£1,680 (after 20% relief) | £0 (pre-tax) |
| Take-home pay | £32,080 | £32,248 |
| Pension pot receives | £2,100 | £2,100 |
Sarah takes home £168 more per year with salary sacrifice — and pays the same into her pension.
Are There Any Downsides?
Salary sacrifice is not cost-free. Be aware of:
- Mortgage applications — lenders use your contracted salary (the reduced figure). This could affect how much you can borrow.
- Statutory pay — maternity, paternity and sick pay are based on qualifying earnings, which salary sacrifice may reduce.
- Life assurance — if your employer's death-in-service benefit is a multiple of salary, a lower salary means a lower payout.
- State pension entitlement — if salary sacrifice brings your earnings below the Lower Earnings Limit (£6,396/yr), it could affect your NI record. This is very unlikely for most workers.
Should You Increase Your Contributions?
If your employer matches additional contributions, increasing your salary sacrifice is almost always worthwhile — it is genuinely free money. Even without matching, the NI saving alone makes salary sacrifice significantly more efficient than paying into a personal pension.
Use our salary calculator to model exactly how different pension percentages affect your take-home under salary sacrifice vs other methods.