How does salary sacrifice affect my pension contributions?

Full answer

Salary sacrifice is widely regarded as one of the most tax-efficient ways to contribute to a pension, since it reduces National Insurance as well as Income Tax, unlike a standard "relief at source" pension contribution made from your take-home pay. **How it technically works** You formally agree with your employer to reduce your contractual salary by an agreed amount, and in exchange, your employer pays that same amount (or sometimes more) directly into your pension as an EMPLOYER contribution -- since your gross salary is genuinely lower, you pay less Income Tax and less employee National Insurance on your reduced pay. **Why it beats a standard pension contribution** A standard pension contribution from your net (after-tax) pay still gets tax relief added back by the pension provider, but it does not reduce your National Insurance liability -- salary sacrifice, by contrast, reduces your NI as well, since the sacrificed amount never appears as your taxable/NI-able pay in the first place. **Employer NI savings often shared** Your employer also saves on their own Class 1 secondary National Insurance (15% for 2026/27) on the sacrificed amount, since it is no longer part of your salary for NI purposes -- many (though not all) employers pass some or all of this employer NI saving back into your pension as an additional contribution, effectively boosting your pension pot beyond just your own sacrificed amount. **Worked example** Someone earning £45,000 sacrifices £3,000 into their pension via salary sacrifice. Their new salary for tax and NI purposes is £42,000. They save 20% Income Tax (£600) and 8% employee NI (£240) on the sacrificed amount -- a combined saving of £840 compared with taking the £3,000 as taxable salary, on top of the pension contribution itself being fully invested. **Impact on other calculations tied to salary** Because salary sacrifice genuinely reduces your contractual salary, it can affect other things calculated based on your salary, such as mortgage affordability assessments (some lenders use post-sacrifice salary), certain life insurance or income protection cover levels, and statutory maternity/paternity pay calculations -- worth checking these implications before committing to a large sacrifice amount. **Minimum wage floor** You cannot sacrifice salary below the National Minimum/Living Wage rate for your age -- lower earners may be restricted in how much they can sacrifice, since employers must ensure your reduced salary still meets minimum wage requirements after the sacrifice. **Practical tip** Check with your employer whether they pass on any of their own NI saving into your pension as an additional contribution -- this varies significantly between employers, and finding an employer who shares this saving can meaningfully increase the value of using salary sacrifice compared with a standard pension contribution.

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