Salary sacrifice is the cheapest way to pay into a pension. On £35,000, putting 5% (£1,750 a year) into your pension this way cuts take-home pay by only £1,260, because you skip income tax and National Insurance on the money. The same contribution by relief at source costs £1,400.
How salary sacrifice works
You agree to a lower salary, and your employer pays the difference straight into your pension. Since that slice is never your pay, no income tax, no National Insurance and no student loan repayment is taken from it. There are three ways a workplace pension can be paid, and they treat the same contribution very differently:
- Salary sacrifice. Comes off before tax and NI. Full relief on both.
- Net pay arrangement. Comes off before tax but after NI. Full tax relief, no NI saving.
- Relief at source. Comes out of taxed pay. The provider adds 20% basic rate relief, and higher rate payers claim the rest through self assessment. No NI saving.
Here is a 2026/27 monthly payslip on £35,000 with a 5% sacrifice. Net pay is £2,288.30, only £105.00 a month below the £2,393.30 you would get with no pension at all, while £145.83 goes into the pot.
Payments
Basic salary£2,916.67
Deductions
Income tax£344.67
National Insurance£137.87
Pension£145.83
Total deductions£628.37
Net pay£2,288.30
The saving at six salaries
Each row puts 5% of salary into a pension and shows what it costs your take-home pay under each method. Relief at source is shown before any higher rate claim, which is what you see on payday.
| Salary | Into pension | Sacrifice costs | Net pay costs | Relief at source costs |
|---|---|---|---|---|
| £25,000 | £1,250 | £900 | £1,000 | £1,000 |
| £35,000 | £1,750 | £1,260 | £1,400 | £1,400 |
| £45,000 | £2,250 | £1,620 | £1,800 | £1,800 |
| £60,000 | £3,000 | £1,740 | £1,800 | £2,400 |
| £80,000 | £4,000 | £2,320 | £2,400 | £3,200 |
| £110,000 | £5,500 | £2,090 | £2,200 | £4,400 |
Put another way, this is what each £100 that reaches your pension really costs you through salary sacrifice:
On £60,000, £100 into your pension through salary sacrifice costs you £58.00
The cheapest row is £110,000, where the sacrifice also claws back personal allowance lost in the 60% tax trap. At £80,000 and £60,000 a higher rate taxpayer saves 40% tax and 2% NI. At £25,000 and £35,000 the saving is 20% tax and 8% NI.
Student loans, child benefit and the 60% trap
Because the sacrificed pay is not pay at all, it also comes off the figure your student loan is worked out on. On £35,000 with a Plan 2 loan, a 5% sacrifice cuts the yearly repayment from £505 to £348. That is 9% of the sacrifice kept in your pocket, which matters most if your balance will be written off before you clear it. The student loan plans guide explains who that applies to.
Sacrifice lowers adjusted net income too. The child benefit high income charge starts at £60,000 and takes it all back by £80,000. A parent on £64,000 who sacrifices £4,000 avoids the charge entirely, and the pension contribution itself only costs £2,320 in take-home pay.
The catches
Your contract salary is lower, and some things are based on it:
- Mortgages. Lenders may use the lower figure. Check before you apply, and see how much you can borrow on each salary.
- Minimum wage. Cash pay after the sacrifice cannot fall below the National Minimum Wage. Full time at £12.71 an hour and 37.5 hours a week that is £24,785 a year.
- Pay-linked benefits. Life cover, overtime rates and some state benefits may be worked out on the reduced salary.
A sacrifice is part of your employment contract, so you normally change it only once a year or when your circumstances change. Plan the amount before you sign.
Should you switch?
If your employer offers salary sacrifice and you are already paying into a pension, switching costs nothing and raises take-home pay straight away. On £35,000 it is worth £140 a year against relief at source for exactly the same pension. Many employers also save their own National Insurance on sacrificed pay, and some add part of that to your pot.
Left to grow, £145.83 a month for 30 years at an assumed 5% a year becomes £121,371, from £52,500 paid in. Test your own numbers in the compound interest calculator, and set your pension percentage and method in the take-home pay calculator to see the result on your own payslip.
Take-home pay calculatorYour salary after income tax, National Insurance, student loan and pension. Open itQuestions people ask
Does salary sacrifice save National Insurance?
Yes. That is the main difference from other pension methods. A basic rate taxpayer saves 8% NI on the sacrificed pay, and a higher rate taxpayer saves 2%, on top of income tax relief.
Is salary sacrifice better than relief at source?
For most employees, yes. Relief at source gives the same income tax relief once any higher rate claim is made, but no NI saving. On £35,000 with 5% going in, sacrifice costs £1,260 a year against £1,400 by relief at source.
Can salary sacrifice take me below the minimum wage?
No. Your cash pay after the sacrifice must stay at or above the National Minimum Wage, which is £12.71 an hour for workers aged 21 and over.
