Salary sacrifice explained
How giving up gross pay for a pension contribution saves tax and National Insurance, and the trade-offs to weigh.
Salary sacrifice is a deal with your employer: you agree to give up part of your gross salary, the pay before tax, and they pay that amount straight into your pension instead. Because the slice you give up never counts as wages, you pay no income tax or employee National Insurance on it. So the amount landing in your pension is more than the drop in your take-home pay.
The short version
- You swap some gross salary for a bigger employer pension contribution of the same amount.
- The sacrifice comes off before income tax and before employee National Insurance, so it costs your take-home less than it adds to your pension.
- Your employer also pays less National Insurance, and may choose to add some or all of that saving to your pension.
- It can lower the salary a mortgage lender sees and trim some earnings-related payments, and you cannot sacrifice below the minimum wage. Every figure here is an estimate to plan with, not financial advice.
How the swap works
Normally your pension contribution comes out of pay you have already been taxed and charged National Insurance on, and the tax relief is added back on top. Salary sacrifice flips that. You and your employer agree to lower your contractual salary by, say, £5,000 a year, and your employer pays that £5,000 directly into your pension as an employer contribution.
The key point is that the £5,000 never reaches you as wages, so it is never taxed or charged National Insurance as your income. That is what sets it apart from paying into a pension the usual way. If you want the bigger picture on pensions and how tax relief works in general, see how pensions work. This article sticks to the sacrifice mechanism and its maths.
Why it saves tax and National Insurance
Two deductions come off your salary before you see it: income tax and employee (primary) National Insurance. Sacrificing salary lowers the pay that both are worked out on, so you pay less of each. How much you save depends on which bands the sacrificed pay would have sat in.
Income tax is charged at 20% on taxable income up to £37,700, 40% up to £125,140, then 45% above that, on income over your £12,570 personal allowance. Employee National Insurance is band-aware too: 8% on earnings between £12,570 and the upper earnings limit (UEL) of £50,270, then 2% above £50,270. So the National Insurance saving is largest on salary between those two figures and much smaller on salary above the upper earnings limit, where you only save 2%.
| Slice of salary you sacrifice | Income tax saved | Employee NI saved |
|---|---|---|
| £12,570 to £37,700 taxable (basic rate) | 20% | 8% |
| Higher rate, up to the £50,270 UEL | 40% | 8% |
| Above the £50,270 UEL | 40% or 45% | 2% |
These are rest-of-UK income tax bands. Scotland has its own rates, but National Insurance is the same across the UK. You can see how the bands stack up on your own pay in how take-home pay works.
The employer National Insurance saving
Your employer pays their own National Insurance on your wages too, called secondary Class 1 National Insurance. For 2026/27 that is 15% on earnings above the £5,000 secondary threshold. When your salary drops through sacrifice, their bill drops with it, so they save 15% of whatever you sacrifice.
Nothing obliges them to hand that saving to you. Some employers keep it, some add part of it to your pension, and the more generous add all of it. If yours passes it on, the amount reaching your pension is larger again, on top of what your own sacrifice already buys you. It is worth asking your employer or scheme administrator what they do.
A worked example
Take someone on a £50,000 salary in the rest of the UK who sacrifices £5,000 a year. The full £5,000 goes into their pension, but it does not cost them £5,000 of take-home pay.
All of the sacrificed £5,000 sits below the £50,270 upper earnings limit and within the basic-rate band, so they save 20% income tax and 8% employee National Insurance on it. That is roughly £1,000 in tax and £400 in National Insurance, about £1,400 in total. So their take-home falls by around £3,600, while £5,000 lands in the pension.
| Amount | |
|---|---|
| Salary sacrificed into the pension | £5,000 |
| Income tax saved (about 20%) | £1,000 |
| Employee National Insurance saved (about 8%) | £400 |
| Real cost to your take-home pay | about £3,600 |
| Employer National Insurance saved (15%) | about £750 |
So £3,600 out of your pocket puts £5,000 into your pension, and the employer separately saves about £750. If your employer adds that £750 to your pension as well, the gap between what you give up and what you gain grows wider still. Change the salary, the amount or the region and the numbers shift, so work out your own with the salary sacrifice calculator. These figures are rounded estimates to show the direction, not a precise payslip.
The trade-offs
A lower headline salary is the catch. A few things are worked out from the salary on your payslip, not your real earning power, so cutting it can have side effects:
- Borrowing for a mortgage. Lenders size a loan against your salary. Some add the sacrificed amount back when they assess you, often with a letter from your employer, but not all do, so it can lower how much you can borrow.
- Earnings-related payments. Some statutory payments, such as maternity or paternity pay, are based on your earnings, so a lower salary can reduce them. Sacrificing below the National Insurance threshold can also affect benefits and your State Pension record.
- The minimum wage floor. You cannot sacrifice so much that your remaining cash pay falls below the National Minimum Wage or National Living Wage for your hours. HMRC enforces this, and schemes usually cap your sacrifice to stay above it.
None of these rule salary sacrifice out, but they are worth weighing, especially if you are about to apply for a mortgage or are on a lower income. If in doubt, check with your employer, HMRC or a qualified adviser before changing your arrangement.
Common questions
- Does salary sacrifice reduce my actual pay?
- Your gross salary on paper goes down by the amount you sacrifice, but the cut to the money that lands in your account is smaller than that. You no longer pay income tax or employee National Insurance on the part you give up, so for every £1 sacrificed your take-home falls by less than £1. The difference is what makes it efficient: more goes into your pension than it costs you in take-home.
- Do I lose the National Insurance saving above £50,270?
- Mostly. Employee National Insurance is 8% on earnings between £12,570 and the upper earnings limit of £50,270, then drops to 2% above that. So if the salary you give up sits above £50,270, you only save 2% in National Insurance on that slice, though you still save income tax at your normal rate on all of it.
- What happens to the National Insurance my employer saves?
- Your employer pays secondary National Insurance at 15% on most of your salary, so a lower salary cuts their bill too. There is no rule forcing them to pass that saving on. Some keep it, some add part of it to your pension, and some add all of it. Whether the saving boosts your pot depends entirely on your employer's scheme, so it is worth asking what yours does.
- Is there a limit to how much I can sacrifice?
- Two limits bite. You cannot sacrifice so much that your remaining cash pay drops below the National Minimum Wage or National Living Wage for your hours, which HMRC enforces. Separately, very large contributions can run into the pension annual allowance, the cap on how much can go in each year with tax relief. Your scheme will usually stop you breaching the wage floor automatically.
- Will salary sacrifice affect how much I can borrow for a mortgage?
- It can. A lender looks at your salary to decide how much to lend, and salary sacrifice lowers the figure on your payslip. Some lenders add the sacrificed amount back when they assess you, often with a letter from your employer, but not all do. If you are about to apply for a mortgage, check how your lender treats it before increasing how much you sacrifice.
- Can I stop or change a salary sacrifice arrangement?
- Usually yes, but it is a change to your employment contract, so you cannot switch it on and off freely. Most employers let you adjust it at set points, such as a change in circumstances like having a baby or a pay review. Check your scheme rules for when and how often you can change the amount.
About this article
Written by the calcd team. We build UK money calculators and explain the numbers behind them in plain English. The rates and thresholds here are for the 2026/27 tax year, checked against gov.uk and HMRC guidance on salary sacrifice and National Insurance, with corroboration from MoneyHelper. The worked figures are rounded estimates to show how the maths runs, not financial advice and not a precise calculation of your pay. Your actual saving depends on your salary, the amount you sacrifice, where you live and your employer's scheme, so confirm the detail with your employer, HMRC or a qualified adviser. Last updated June 2026.