Salary Sacrifice Into a Pension 2026/27: How the NI Saving Works

What Salary Sacrifice Actually Is

Salary sacrifice is a formal agreement to give up part of your contractual salary in exchange for a non-cash benefit, in this case an employer contribution to your pension. Instead of receiving, say, £5,000 of salary and then paying some of it into a pension yourself, you agree to a lower salary and your employer pays that £5,000 straight into your pension.

The point of doing it this way is tax. Money you never receive as salary is not subject to income tax or National Insurance. A normal personal pension contribution gets income tax relief, but you still pay National Insurance on the money before it goes in. Salary sacrifice removes the National Insurance too, which is why it is usually the most efficient way to fund a pension from employment income.

The National Insurance Advantage

This is the heart of why salary sacrifice works. Consider the two routes for putting £100 of gross pay into a pension.

With a normal contribution, you get income tax relief but still pay employee National Insurance on the amount before it goes in. With salary sacrifice, the sacrificed pay never counts as your earnings, so you save your National Insurance as well. On top of that, your employer saves their National Insurance, currently 15% on most earnings above the secondary threshold.

Many employers choose to pass some or all of their National Insurance saving into your pension as well. So a £100 sacrifice can result in more than £100 landing in your pension, because the employer adds their saved NI. Not all employers do this, so it is worth asking what your scheme offers.

A Worked Example

Tom is a higher-rate taxpayer earning £60,000. He decides to sacrifice £5,000 of salary into his pension.

By sacrificing the £5,000, he avoids 40% income tax (£2,000) and 2% employee National Insurance on that band (£100), because earnings above the upper threshold attract the lower 2% NI rate. The full £5,000 goes into his pension, and his take-home pay falls by only about £2,900, the net cost of the £5,000 contribution.

If Tom's employer passes on their 15% National Insurance saving, an extra £750 goes into his pension too, so £5,750 is invested for a net cost to Tom of around £2,900. That is a powerful boost compared with a personal contribution, where he would have saved the income tax but not his National Insurance, and would not have received the employer's NI saving.

Lower Earners and the Basic Rate

The mechanics work at the basic rate too, just with different numbers. A basic-rate taxpayer earning £35,000 who sacrifices £2,000 saves 20% income tax (£400) and 8% employee National Insurance on that band (£160), so the £2,000 contribution costs them around £1,440 in reduced take-home pay, before any employer NI top-up.

The National Insurance saving is actually proportionally larger for basic-rate earners, because the employee NI rate on earnings within the main band is higher than the 2% that applies above the upper threshold. This makes salary sacrifice attractive across the income range, not just for high earners.

The Limits and the Minimum Wage Rule

There is an important floor. Salary sacrifice cannot reduce your cash pay below the National Minimum Wage or National Living Wage for the hours you work. Employers must cap how much you can sacrifice so your remaining cash pay stays above the legal minimum.

This means lower earners sometimes cannot sacrifice large amounts, because there is little room above the minimum wage. Employers typically set a maximum percentage you can give up to stay safely within the rules.

The Annual Allowance Still Applies

Salary sacrifice does not get around the pension annual allowance. The contribution your employer makes through the sacrifice counts towards your annual allowance, which is £60,000 in 2026/27 for most people, or your relevant earnings if lower. High earners may have a tapered allowance, and anyone who has flexibly accessed a pension may be limited to the £10,000 money purchase annual allowance.

If you are making large sacrifices, check you are within your available allowance, including any carry forward from the three previous tax years, to avoid an annual allowance charge.

What to Check Before You Sacrifice

Salary sacrifice lowers your stated contractual salary, and several things key off that figure. Before sacrificing a large amount, check:

• Mortgage borrowing. Many lenders assess affordability on your reduced salary, though some add pension contributions back. A large sacrifice could reduce how much you can borrow.
• Statutory pay. Maternity pay, redundancy pay, and similar entitlements can be based on your reduced salary.
• Earnings-related benefits. Some benefits depend on your stated earnings.
• Life cover and income protection. Employer schemes based on a multiple of salary may use the reduced figure unless they specify pre-sacrifice pay.

For many people none of these is a problem, but it is worth confirming rather than assuming. A simple conversation with your payroll or HR team usually clears it up.

How to Set It Up

Salary sacrifice has to be arranged through your employer; you cannot do it yourself with a personal pension. Your employer amends your contract to reflect the lower salary and agrees to pay the sacrificed amount into the pension scheme. The change usually has to be prospective, applying to future earnings rather than pay you have already earned, and you typically cannot dip in and out at will, though many schemes allow periodic changes.

If your employer offers salary sacrifice and passes on some of their National Insurance saving, it is one of the most efficient ways to build retirement savings available to an employee. Ask your payroll team what your scheme offers, check the points above, and confirm you are within your annual allowance.

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