How salary sacrifice works
With salary sacrifice, you agree to a lower salary and your employer pays the difference straight into your pension. Because the money never counts as your pay, you don't pay income tax or National Insurance on it, and student loan repayments are worked out on the lower salary too. Your employer saves its own 15% National Insurance on it as well, and some employers add that saving to your pension.
Compared with a normal "net pay" workplace pension, which already saves you income tax, salary sacrifice adds the National Insurance saving: 8% of what you sacrifice if you earn under £50,270, or 2% above that.
When it saves the most
- Between £100,000 and £125,140. You lose £1 of your tax-free allowance for every £2 you earn over £100,000, so pay in that band is taxed at an effective 60%. Sacrificing enough to get back to £100,000 can make each £1 in your pension cost you about 38p.
- Over £60,000 with children. The High Income Child Benefit Charge claws back 1% of your Child Benefit for every £200 over £60,000. Salary sacrifice lowers the income it's worked out on.
- Childcare support. Tax-Free Childcare and funded childcare hours in England stop if either parent's adjusted net income is over £100,000. Getting under that line can be worth thousands a year.
Things to check first
- Your pay after sacrifice can't fall below the National Minimum Wage for the hours you work.
- A lower salary can reduce how much a mortgage lender offers, and some benefits linked to salary, such as life cover or statutory maternity pay. Ask your employer how they handle this.
- You can usually only change your sacrifice once a year, or after a major life event.
- From 6 April 2029, only the first £2,000 a year of pension salary sacrifice will be free of National Insurance. Anything above that will still be free of income tax.
Salary sacrifice is also used for things like Cycle to Work schemes and electric company cars. This calculator covers pension contributions only.