Comparison · Pension 2025/26
Salary Sacrifice vs Personal Pension
Both are tax-efficient ways to build a pension. Salary sacrifice almost always saves more because it avoids National Insurance too — but it requires employer setup. Personal pension (SIPP or workplace «relief at source») works without an employer scheme.
TL;DR — 30 Second Answer
- • Salary sacrifice wins if your employer offers it
- • Saves Income Tax + NI (vs personal pension which saves Income Tax only)
- • Best deal: employer passes on their 15% NI saving as extra pension
- • Personal/SIPP wins if self-employed, no employer scheme, or you need flexibility
£5,000 Contribution Compared — Basic-Rate (£40k salary)
| Item | Salary Sacrifice | Personal Pension (SIPP) |
|---|---|---|
| Gross salary reduction | £5,000 | £0 |
| You pay (net) | £3,600 | £4,000 |
| HMRC tax relief added | — | £1,000 |
| Employer NI saving (often passed on) | +£750 bonus | — |
| Pension pot value | £5,750 | £5,000 |
| Effective net cost | £3,600 | £4,000 |
Salary sacrifice: £5,000 × (20% tax + 8% NI) saved = £1,400. Plus 15% employer NI = +£750 bonus if employer passes on.
Higher-Rate (£70k salary) — Same £5,000
| Item | Salary Sacrifice | Personal Pension |
|---|---|---|
| Tax saving (40% IT + 2% NI) | £2,100 (42%) | £2,000 (40%) |
| Method | Automatic via payroll | 20% auto + 20% via Self Assessment |
| Net cost for £5,000 pot | £2,900 | £3,000 |
| With employer NI pass-on | £5,750 pot for £2,900 | £5,000 pot for £3,000 |
Watch-outs With Salary Sacrifice
- Mortgage applications: Some lenders use post-sacrifice salary — could reduce your borrowing capacity. Ask broker.
- Statutory pay (SMP, SPP): Calculated on post-sacrifice earnings — can reduce maternity/paternity pay.
- Life insurance / income protection: Often calculated as multiple of salary — reduced.
- National Minimum Wage floor: Cannot sacrifice below NMW (£12.21/hr from April 2025).
- State Pension years: If sacrifice pushes you below £6,396 NI threshold, that year doesn\'t count. Most people are safe.
- Annual Allowance £60,000 cap applies to total contributions (salary sacrifice + employer + personal).
When Personal Pension Wins
- Self-employed: No employer, so no salary sacrifice option — SIPP is the standard.
- No employer scheme available or employer doesn\'t support sacrifice for your contribution amount.
- You want broader investment choice than your workplace scheme offers — SIPP has thousands of funds.
- Consolidating old pensions — transfer multiple workplace pensions into one SIPP.
- Need flexibility to vary contributions month-by-month (sacrifice typically locked-in via salary).
Pension Calculators
Calculators for this topic
Pension Calculator
Estimate your pension pot at retirement and projected annual income.
Take-Home Pay Calculator
Calculate your net salary after income tax, National Insurance and student loan deductions.
Income Tax Calculator
Work out how much income tax you owe using the latest 2025/26 UK tax bands.
National Insurance Calculator
Calculate your National Insurance contributions for 2025/26.
Disclaimer: Pension rules change — always check current Annual Allowance, MPAA and tapered allowance for high earners. Mortgage/insurance implications vary by provider. Consider Pension Wise (free, gov.uk) or a financial adviser for large decisions.