Comparison · Pensions & Payroll · 2026
Salary Sacrifice vs Net Pay Arrangement Pension 2026: Where Does the NI Saving Go?
Most UK workplace pensions collect contributions in one of two ways: a net pay arrangement or salary sacrifice. Both give you full income tax relief automatically -- the real difference, and the one most people never see explained, is what happens to National Insurance. This guide compares both methods using 2026/27 rates.
TL;DR -- 30-Second Summary
- • Income tax relief is identical under both methods -- full relief at your marginal rate, automatically
- • Net pay arrangement: National Insurance is still charged on your full, unreduced salary
- • Salary sacrifice: reduces your contractual salary, saving employee NI (8%/2%) AND employer NI (15%)
- • Salary sacrifice can reduce your payslip salary figure -- worth checking before a mortgage application
- • Net pay arrangements give no tax relief at all to earners below the GBP 12,570 Personal Allowance
Side-by-Side Comparison
| Feature | Net pay arrangement | Salary sacrifice |
|---|---|---|
| Contractual salary | Unchanged | Reduced by the sacrificed amount |
| Income tax relief | Full relief, automatic | Full relief, automatic (never taxed) |
| Employee NI saving (2026/27: 8%/2%) | None | Yes, on the sacrificed amount |
| Employer NI saving (2026/27: 15%) | None | Yes -- sometimes reinvested into your pension |
| Relief for earners below GBP 12,570 PA | None -- no tax to relieve | N/A -- income never received or taxed |
| Mortgage-affordability salary shown | Full contractual salary | Reduced, post-sacrifice salary |
Worked Example: GBP 40,000 Salary, GBP 2,000 (5%) Pension Contribution
A basic-rate taxpayer earning GBP 40,000 pays 5% of salary (GBP 2,000) into their pension, using 2026/27 thresholds: GBP 12,570 Personal Allowance, 20% basic rate, 8% employee NI (up to the GBP 50,270 upper earnings limit) and 15% employer NI.
| Measure | Net pay arrangement | Salary sacrifice |
|---|---|---|
| Salary used for tax | GBP 38,000 taxable (GBP 40,000 gross) | GBP 38,000 contractual salary |
| Income tax saved vs no pension | GBP 400 (20% of GBP 2,000) | GBP 400 (20% of GBP 2,000) |
| Salary used for employee NI | GBP 40,000 (unreduced) | GBP 38,000 (reduced) |
| Employee NI saved vs no pension | GBP 0 | GBP 160 (8% of GBP 2,000) |
| Employer NI saved (15% of GBP 2,000) | GBP 0 | GBP 300 (employer keeps or reinvests) |
| Total employee saving | GBP 400 | GBP 560 |
Both methods deliver the same GBP 400 of income tax relief. Salary sacrifice adds a further GBP 160 of employee National Insurance saving purely because the employee's NI-able pay is genuinely lower, plus GBP 300 of employer NI that some employers add back into the pension pot on top of the contribution.
When Salary Sacrifice Wins
Salary sacrifice wins for almost anyone not about to apply for a mortgage or another product that assesses affordability on payslip salary. The National Insurance saving is free money on top of identical income tax relief, and many employers pass on some or all of their own 15% NI saving as an enhanced pension contribution -- ask your HR team whether yours does.
When a Net Pay Arrangement Still Makes Sense
A net pay arrangement keeps your contractual salary intact, which matters if you are about to apply for a mortgage, remortgage, or any other product where the lender uses your payslip gross salary rather than a pension-adjusted figure. It also matters if your employer does not offer salary sacrifice at all, in which case a net pay arrangement (or relief-at-source scheme) is simply what is available.
Frequently Asked Questions
Frequently Asked Questions
What is the main difference between salary sacrifice and a net pay arrangement?
Both are ways your employer collects pension contributions, and both give you full income tax relief at your marginal rate automatically through payroll, with no need to claim anything back. The difference is National Insurance: a net pay arrangement only reduces your taxable pay, so your National Insurance is still calculated on your full contractual salary. Salary sacrifice actually reduces your contractual salary in exchange for a larger employer pension contribution, so both your employee National Insurance and your employer's National Insurance are calculated on the lower amount.
Do I get the same income tax relief either way?
Yes. Under a net pay arrangement, your contribution is deducted from your gross pay before income tax is worked out, so you get relief at your full marginal rate (20%, 40% or 45% for 2026/27) immediately, with no separate claim needed. Under salary sacrifice, you never receive the sacrificed salary in the first place, so it is never taxed at all -- the practical effect on your income tax bill is identical to a net pay arrangement for the same cash amount.
Why doesn't a net pay arrangement save National Insurance?
Because your contractual salary is unchanged. National Insurance is calculated on your cash earnings before the net pay pension deduction is applied for tax purposes, so HMRC still charges employee NI at 8% (2026/27, up to the GBP 50,270 upper earnings limit) and 2% above that, and your employer still pays 15% employer NI, on your full salary. The pension deduction only ever affects the income tax calculation, not the National Insurance calculation.
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How much National Insurance does salary sacrifice actually save?
It depends on your salary band. If your sacrificed amount falls entirely within the 8% employee NI band (earnings between the GBP 12,570 primary threshold and the GBP 50,270 upper earnings limit for 2026/27), you save 8p in employee NI for every GBP 1 sacrificed, on top of the income tax relief you would have got anyway. Above the upper earnings limit, the employee NI saving drops to 2%. Your employer also saves 15% employer NI on the sacrificed amount, which some employers pass back to you as an enhanced pension contribution.
Does salary sacrifice affect my mortgage application?
It can. Salary sacrifice reduces your contractual gross salary, and some (though not all) mortgage lenders use your post-sacrifice payslip salary rather than your pre-sacrifice figure when assessing affordability, which can reduce how much you are offered to borrow. A net pay arrangement does not have this effect, because your contractual salary is never reduced -- only your taxable pay is. If you are planning a mortgage application soon, it is worth checking with your employer or a broker before increasing a salary sacrifice contribution.
What happens to low earners under a net pay arrangement?
Employees whose earnings are below the GBP 12,570 Personal Allowance pay no income tax, so a net pay arrangement gives them no tax relief on their contributions at all -- there is no tax to relieve. By contrast, a relief-at-source scheme (a separate third method, distinct from both net pay and salary sacrifice) still adds a 20% top-up even to non-taxpayers. This gap has been a long-running policy issue, and the government has committed to a low-earner top-up for those affected by net pay schemes -- check current HMRC guidance for the latest position on timing and eligibility.
Can my employer force me onto salary sacrifice?
An employer can offer salary sacrifice and encourage take-up, but it works by legally varying your employment contract, so it should be offered with clear information and, in most well-run schemes, an opt-out. Some lower earners can be excluded from salary sacrifice by their employer or pension provider if sacrificing would take their contractual pay below the National Minimum Wage, since that is not legally permitted.
Does salary sacrifice affect other pay-related benefits?
It can, because several statutory calculations use your contractual salary rather than your pension-adjusted take-home pay in different ways. Statutory Maternity Pay, Statutory Sick Pay and redundancy pay calculations are generally based on average weekly earnings, and a lower contractual salary from sacrifice can, in some circumstances, reduce these. Many employers apply rules to protect employees from this during maternity leave specifically -- check your employer's scheme rules if this matters to you.
Which one should higher-rate taxpayers choose?
If your employer offers a genuine choice, salary sacrifice is almost always more valuable for a higher-rate taxpayer, because you keep the same 40% income tax relief as a net pay arrangement but add a 2% employee NI saving above the upper earnings limit (or 8% on the portion still in the basic-rate NI band), plus your employer's 15% NI saving, some or all of which may be added back into your pension. The only reasons to prefer a net pay arrangement are the mortgage-affordability point above or a specific employer scheme design you prefer.
How do I check whether my own pension scheme is net pay or salary sacrifice?
Look at your payslip. Under salary sacrifice, your gross pay figure itself will already be reduced by the pension amount, and you will usually see a note such as "salary exchange" or "SMART pension." Under a net pay arrangement, your gross pay figure stays at your full contractual salary, and the pension deduction appears as a separate line before the tax calculation. If you are unsure, your payroll or HR team can confirm which method your employer uses.
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Disclaimer: This comparison is general information for 2026/27 based on standard pension contribution mechanics and simplified assumptions. It is not financial or tax advice. Scheme rules vary by employer and pension provider -- check your own scheme documentation or speak to a regulated adviser before making decisions.