Salary sacrifice (also called salary exchange) is the single most powerful tax-saving strategy available to UK employees. By exchanging part of your salary for employer pension contributions, you can save on Income Tax, National Insurance, and student loan repayments simultaneously. This guide shows you exactly how to maximize these savings.
What Is Salary Sacrifice?
Salary sacrifice means you agree with your employer to give up part of your gross salary in exchange for a non-cash benefit - in this case, pension contributions. The sacrificed amount goes into your pension before Income Tax or National Insurance is calculated.
Standard pension contribution:
- You receive £50,000 gross salary
- Income Tax and NI deducted
- You contribute £5,000 to pension from net pay
- You claim 20-45% tax relief back
Salary sacrifice pension: - You agree to £45,000 gross salary - Employer contributes £5,000 directly to your pension - No Income Tax or NI on the £5,000 - You save Income Tax, NI, and student loans on £5,000
The key difference: the £5,000 never counts as your income, so you never pay tax or NI on it.
Use our Salary Sacrifice Calculator to calculate your exact savings.
How Much You Save With Salary Sacrifice
The amount you save depends on your tax bracket and whether you pay student loans:
Basic Rate Taxpayer (£12,571-£50,270) Savings per £1,000 sacrificed: - Income Tax saved (20%): £200 - Employee NI saved (8%): £80 - Total saved: £280 (28%)
With Plan 2 student loan: - Income Tax (20%): £200 - Employee NI (8%): £80 - Student loan (9%): £90 - Total saved: £370 (37%)
Higher Rate Taxpayer (£50,271-£125,140) Savings per £1,000 sacrificed: - Income Tax saved (40%): £400 - Employee NI saved (2%): £20 - Total saved: £420 (42%)
With student loan: - Income Tax (40%): £400 - Employee NI (2%): £20 - Student loan (9%): £90 - Total saved: £510 (51%)
In the 60% Tax Trap (£100,000-£125,140) Savings per £1,000 sacrificed: - Income Tax saved (60%): £600 - Employee NI saved (2%): £20 - Total saved: £620 (62%)
With student loan: - Income Tax (60%): £600 - Employee NI (2%): £20 - Student loan (9%): £90 - Total saved: £710 (71%)
This is THE most powerful way to escape the 60% tax trap.
Additional Rate Taxpayer (Above £125,140) Savings per £1,000 sacrificed: - Income Tax saved (45%): £450 - Employee NI saved (2%): £20 - Total saved: £470 (47%)
Compare this with standard pension contributions where you only save the Income Tax (20-45%), not the NI or student loan repayments.
Real Examples: Salary Sacrifice in Action
Example 1: £35,000 Salary, Basic Rate Taxpayer
Without salary sacrifice:
- Gross salary: £35,000
- Take-home: £27,614
- Personal contribution to pension: £2,000 (from net pay)
- Actual cost to you: £2,000
- Pension contribution after tax relief: £2,500
With salary sacrifice: - Agreed salary: £33,000 - Employer contributes: £2,000 to pension - Take-home: £26,174 - Actual cost to you: £1,440 (£27,614 - £26,174) - Pension contribution: £2,000 - Saving: £560 (28%)
You pay £1,440 to get £2,000 into your pension vs £2,000 for £2,500 the old way. Salary sacrifice puts more into your pension for less cost.
Example 2: £65,000 Salary, Higher Rate Taxpayer
Without salary sacrifice:
- Gross salary: £65,000
- Take-home: £45,766
- Personal contribution: £5,000 (from net pay)
- Actual cost: £5,000
- Pension after tax relief: £6,250
With salary sacrifice: - Agreed salary: £60,000 - Employer contributes: £5,000 to pension - Take-home: £43,666 - Actual cost: £2,100 (£45,766 - £43,666) - Pension contribution: £5,000 - Saving: £2,900 (58%)
For a £5,000 pension contribution, you only pay £2,100 out of pocket with salary sacrifice vs £5,000 without it.
Example 3: £110,000 Salary, 60% Tax Trap
Salary sacrifice of £10,000:
- Reduces income from £110,000 to £100,000
- Escapes Personal Allowance taper entirely
- Saves 60% Income Tax: £6,000
- Saves 2% NI: £200
- Restores Personal Allowance: £5,000 × 20% = £1,000 additional saving
- Total benefit: £7,200 for £10,000 pension contribution
- Effective cost: £2,800 to put £10,000 in pension
This is the most tax-efficient strategy for anyone in the 60% trap. Check your optimal contribution with our Pension Calculator.
Employer NI Savings
Your employer ALSO saves National Insurance (13.8%) on your sacrificed salary. Some employers share these savings with you by increasing their pension contribution.
Example: £5,000 salary sacrifice - Employer NI saved: £5,000 × 13.8% = £690 - Employee saves: £280-£620 depending on tax rate - Combined saving: £970-£1,310
Progressive employers might:
- Add the full £690 to your pension (total £5,690 goes in)
- Split the saving 50/50 (£345 to your pension, £345 to company)
- Keep all savings (standard approach)
Always ask if your employer shares their NI savings!
Annual Allowance and Limits
The maximum you can contribute to pensions while receiving tax relief is the Annual Allowance: £60,000 (2025/26).
Important limits:
- Annual Allowance: £60,000 per tax year
- Cannot sacrifice below National Minimum Wage
- Cannot sacrifice below Lower Earnings Limit (£6,396) for NI purposes
- Total contributions (employee + employer) count toward £60,000
Tapered Annual Allowance: If you earn over £200,000 (adjusted income), your allowance reduces by £1 for every £2 over £200,000, down to a minimum of £10,000.
Carry forward: Unused allowance from the previous 3 tax years can be carried forward, potentially allowing contributions up to £240,000 in one year.
See our Pension Tax Relief Guide for complete details on allowances and limits.
What Salary Sacrifice Affects (And Doesn't Affect)
Salary sacrifice REDUCES: ✅ Income Tax ✅ National Insurance ✅ Student loan repayments ✅ Child Benefit charge (HICBC) ✅ Adjusted net income for tax purposes
Salary sacrifice DOES NOT affect: ✅ State Pension entitlement (still based on NI record) ✅ Mortgage affordability (lenders look at gross + pension = original salary) ✅ Maternity/paternity pay (based on average earnings over a period) ✅ Redundancy pay (based on gross salary, not reduced salary) ✅ Death in service benefits (typically a multiple of full salary)
Salary sacrifice CAN reduce: ⚠️ Life insurance cover if based on salary multiples ⚠️ Income protection insurance benefits ⚠️ Some company benefits linked to salary
Always check your specific employer's rules and insurance policies before committing to large salary sacrifice amounts.
How to Set Up Salary Sacrifice
Most employers offer salary sacrifice through their pension scheme, but setup varies:
Step 1: Check eligibility
- Speak to HR or check your employee handbook
- Confirm employer offers salary sacrifice
- Check if there are NI savings sharing arrangements
Step 2: Calculate optimal amount
- Use our Salary Sacrifice Calculator
- Consider tax bracket, student loans, HICBC impact
- Don't reduce salary below minimum wage or LEL
Step 3: Complete paperwork
- Sign salary sacrifice agreement with employer
- Agreement typically states your reduced salary
- Usually processed from the following pay period
Step 4: Monitor on payslip
- Check your payslip shows reduced gross salary
- Verify pension contribution is correct amount
- Confirm tax and NI calculated on reduced salary
Step 5: Review annually
- Reassess amount each year
- Increase contributions with pay rises
- Adjust if circumstances change (tax bracket, student loan paid off)
Salary Sacrifice vs Net Pay Contributions
There are three ways to contribute to a pension:
1. Relief at Source (Personal Pensions) - You contribute from net pay (after tax) - Pension provider claims 20% tax relief from HMRC automatically - Higher rate taxpayers claim additional relief via Self Assessment - No NI or student loan savings
2. Net Pay Arrangement (Some Workplace Pensions) - Contributions deducted before Income Tax calculated - Saves Income Tax automatically (20-45%) - No NI or student loan savings - Better than relief at source for higher rate taxpayers
3. Salary Sacrifice (Best Option) - Reduces gross salary before tax and NI - Saves Income Tax (20-60%) - Saves Employee NI (8% or 2%) - Saves student loan repayments (6-9%) - Maximum tax efficiency
If your employer offers salary sacrifice, it's virtually always better than net pay or relief at source methods.
## Summary
Salary sacrifice is the most tax-efficient way to save for retirement in the UK. By exchanging gross salary for employer pension contributions, you save 28-71% on every pound depending on your tax bracket and whether you pay student loans.
Key benefits:
- Save Income Tax (20-60%)
- Save Employee National Insurance (2-8%)
- Save student loan repayments (6-9%)
- Reduce Child Benefit charge if applicable
- Employer may share their 13.8% NI savings with you
Optimal for:
- Higher rate taxpayers (42-51% savings)
- Anyone earning £100k-£125k in the 60% trap (62-71% savings)
- Those with student loans (extra 6-9% saving)
- Anyone paying Child Benefit charge (reduces adjusted net income)
Use our Salary Sacrifice Calculator to calculate your exact tax savings and optimal contribution amount. Combined with the Take-Home Pay Calculator, you can model the impact on your monthly budget.