Is salary sacrifice better than relief-at-source for pension contributions?

Full answer

Salary sacrifice and relief-at-source are two different ways of getting pension contributions into your pot, and while both ultimately benefit from tax relief, salary sacrifice is generally the more tax-efficient method for most employees where an employer offers it. **How relief-at-source works** With a standard relief-at-source arrangement (common for many workplace and personal pensions), you contribute from your NET (after-tax) pay, and the pension provider automatically claims basic-rate tax relief (20%) from HMRC and adds it to your pot -- so a £80 net contribution becomes £100 in your pension. Higher and additional-rate taxpayers must separately claim the extra relief above basic rate through Self Assessment or by contacting HMRC, since the automatic 20% top-up only accounts for basic-rate relief. **How salary sacrifice works** With salary sacrifice, you formally agree to reduce your contractual gross salary by the amount you want to contribute, and your employer pays that amount directly into your pension instead, as an employer contribution. Because the sacrificed amount never appears as part of your taxable gross salary in the first place, it automatically avoids Income Tax at your marginal rate AND National Insurance (8% for most employees up to the Upper Earnings Limit, 2% above it) -- neither of which would have applied if you'd simply had it paid as salary and then contributed via relief-at-source. **The employer NI saving -- sometimes shared with you** Because your employer also saves their 15% employer National Insurance on the sacrificed amount (since it's no longer part of your salary for NI purposes), many employers pass some or all of this employer NI saving back into your pension as an additional contribution on top of what you sacrificed -- effectively boosting your pension further beyond your own contribution, though this is at each employer's discretion and not guaranteed. **Worked comparison** A basic-rate taxpayer sacrificing £100 of gross salary avoids £20 Income Tax and £8 National Insurance they would otherwise have paid on that £100, meaning the full £100 goes into their pension at an effective net cost of just £72 in reduced take-home pay. The equivalent relief-at-source contribution would require contributing £80 net to get £100 in the pension (via the automatic 20% top-up), but the £8 National Insurance saving would never be captured, since NI was already deducted before the contribution was made. **Downsides of salary sacrifice** Because your official gross salary is reduced, this can affect other salary-linked calculations: mortgage lenders assessing affordability based on your payslip gross salary may see a lower figure; statutory pay calculations (such as Statutory Maternity Pay, which is based partly on average earnings) could be affected; and life assurance or income protection benefits calculated as a multiple of salary might pay out less. Some employees near the National Minimum Wage or National Living Wage threshold may also not be able to sacrifice if it would take their pay below the legal minimum. **Not everyone can use salary sacrifice** Salary sacrifice requires your employer to offer it as an option, and it must be set up correctly as a genuine contractual variation (not simply a payroll relabelling) to be valid for tax purposes -- not all employers, particularly smaller ones, offer salary sacrifice pension schemes. **Practical tip** If your employer offers salary sacrifice AND passes on some or all of the employer National Insurance saving into your pension, it is almost always more tax-efficient than a standard relief-at-source contribution -- but if you're planning a mortgage application or a period where statutory pay might apply, discuss the timing with your employer, since a temporary pause or reduction in salary sacrifice might be worth considering around those events.

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