With salary sacrifice, you agree to give up part of your salary, and your employer pays that amount straight into your pension instead. Because the money never reaches you as pay, it is not subject to Income Tax or National Insurance — and that second saving is what sets it apart from an ordinary pension.
Why it beats a normal pension
Every pension contribution saves Income Tax. The difference is National Insurance:
- Salary sacrifice — you formally give up the salary, so you save Income Tax and the 8% (or 2%) National Insurance on it.
- Net-pay schemes (most workplace pensions) — the contribution comes off before Income Tax, but after National Insurance, so you keep the tax relief but not the NI saving.
- Relief at source (personal pensions and SIPPs) — you pay from your net salary and the provider adds basic-rate relief; higher-rate relief is claimed back separately, and there is no NI saving.
What it's worth
Take a £40,000 salary sacrificing 10% — that is £4,000 into the pension. A basic-rate taxpayer keeps the 20% tax and 8% NI they would have paid, so the £4,000 in the pension costs only about £2,880 of take-home. Compared with paying the same into a relief-at-source pension, salary sacrifice leaves you roughly £320 a year better off — purely the National Insurance you saved. For higher-rate taxpayers the relief is larger still. Our salary sacrifice calculator shows the figures for your salary and contribution.
It's the best tool for the £100k trap
Because salary sacrifice reduces your adjusted net income, it is the most efficient way to escape the £100,000 tax trap: sacrificing enough to bring your income down to £100,000 restores your Personal Allowance and removes the 60% band, with the NI saving on top.
The trade-offs
- Your gross salary falls. Mortgage lenders, some benefits, and statutory payments (like maternity pay) can be based on the lower figure — though many lenders add pension contributions back.
- The minimum wage is a floor. You cannot sacrifice salary below the National Living Wage.
- It is a formal change to your contract, usually arranged through your employer, and you typically cannot dip in and out at will.
- A future cap. From 2029/30, the National Insurance saving on salary sacrifice is due to be capped (announced at the Autumn Budget 2025). It does not affect 2026/27, but it is worth keeping an eye on.
In short
If your employer offers it, salary sacrifice is usually the most efficient way to build a pension — it saves Income Tax and National Insurance, and it is the sharpest tool for higher earners near £100,000. Just keep an eye on your gross salary if you have a mortgage application or statutory pay on the horizon.