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
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Income Tax tool
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National Insurance tool
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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.