How does pension salary sacrifice work?

In a pension salary sacrifice arrangement, the employee agrees to reduce their gross salary by the pension contribution amount. The employer pays this amount directly into the pension as an employer contribution. Because the salary is lower, both employer and employee pay less National Insurance — and the employee also pays less income tax.

How much NI does pension salary sacrifice save?

In 2026/27, employer NI is 15% on earnings above £5,000. If an employee sacrifices £5,000/year, the employer saves £750 in NI. The employee saves NI at 8% (basic rate earners below the Upper Earnings Limit) or 2% (higher earners). The employee also saves income tax at their marginal rate — making pension sacrifice more efficient than a personal pension contribution.

Should the employer pass their NI saving into the pension?

Many employers do pass some or all of their NI saving into the employee's pension. This boosts the pension at zero net cost to the employer. For a £5,000 sacrifice the employer saves £750 — if they add this to the pension, the total contribution becomes £5,750 instead of £5,000, all at no extra cost. Our calculator shows this option.

Is pension salary sacrifice better than a personal contribution?

Yes, for most employees. A personal pension contribution (relief at source or net pay) saves income tax but not National Insurance. Salary sacrifice saves both NI and income tax — making it more efficient. The effective "cost" of a £5,000 pension contribution through salary sacrifice is £3,200 for a basic rate taxpayer (20% income tax + 8% NI = 28% saved). The same contribution through personal pension saves only 20% income tax.

Does salary sacrifice pension affect statutory pay?

Yes. Salary sacrifice reduces your contractual gross pay, which affects Statutory Maternity Pay (SMP), Statutory Sick Pay (SSP), Statutory Paternity Pay, and redundancy calculations — all of which are based on average weekly earnings. Employers should consider this carefully and may choose to exclude certain earnings from sacrifice for statutory pay purposes.

Does pension salary sacrifice affect auto-enrolment minimums?

Salary sacrifice reduces gross salary, which reduces the qualifying earnings figure used for auto-enrolment minimum contributions. Employers must ensure that after the sacrifice, total contributions (employer + employee) still meet the minimum 8% of qualifying earnings. Most pension schemes have rules addressing this.

What is the difference between net pay arrangement and salary sacrifice?

Both result in pension contributions being taken from gross pay (before income tax). The difference: with net pay, the employee contribution is deducted before PAYE is calculated, saving income tax. With salary sacrifice, the contribution becomes an employer contribution — saving both income tax and NI for both parties. Salary sacrifice is generally more efficient.

Salary Sacrifice Pension Calculator 2026/27 — Tax & NI Saved

Calculate the NI and income tax savings from pension salary sacrifice — for both employer and employee. See the net cost to the employee and the option to pass the employer's NI saving directly into the pension pot. Updated for 2026/27.

Pension Salary Sacrifice: The Most Efficient Way to Save for Retirement

Pension salary sacrifice (also called salary exchange for pensions) is the most tax-efficient way for employees to save into a workplace pension — and it benefits employers too. By making pension contributions through salary sacrifice instead of personal contributions, both parties save National Insurance.

Why Pension Sacrifice Beats a Personal Contribution

Method	Income tax relief	Employee NI saving	Employer NI saving
Salary sacrifice	Yes	Yes (8% or 2%)	Yes (15%)
Relief at source (personal)	Yes (via HMRC)	No	No
Net pay arrangement	Yes (via payroll)	No	No

The Employer NI Saving — Pass It to the Employee's Pension

When an employee sacrifices salary, the employer pays less NI. A growing number of employers pass some or all of this saving into the employee's pension — a practice known as "NI top-up" or "employer matching of NI saving."

For a basic rate employee sacrificing £5,000/year, the employer saves £750 in NI (15%). If that £750 goes into the pension, the total contribution becomes £5,750 — at zero net cost to the employer. The employee gets an extra £750 per year in pension savings they would otherwise not receive.

The £100,000 Tax Trap: Where Pension Sacrifice Saves Most

Between £100,000 and £125,140 of income, the £12,570 personal allowance is withdrawn by £1 for every £2 earned. Each extra pound in that band is taxed at 40% and also costs 50p of allowance, so the effective income tax rate is 60%, plus 2% National Insurance. Sacrificing salary into a pension reverses it: every pound sacrificed in that band gets the allowance back.

Example: a £110,000 salary, sacrificing £10,000 into a pension (2026/27, England, Wales and Northern Ireland).

	No sacrifice	Sacrifice £10,000	Saved
Salary	£110,000	£100,000
Income tax	£33,432	£27,432	£6,000
Employee NI	£4,211	£4,011	£200
Into pension	£0	£10,000
Net cost to the employee		£3,800

£10,000 goes into the pension for £3,800 of take-home pay. The employer also saves 15% employer NI on the amount sacrificed. Scottish taxpayers save more, because the Scottish rates in this band are higher. The trap is measured on adjusted net income, so a bonus or benefits in kind can push you into it even when your salary is below £100,000.

Setting Up Pension Salary Sacrifice

To implement pension salary sacrifice:

The employee must formally agree to reduce their contractual salary in writing
The employer increases their pension contribution by the same amount
The sacrifice must be a genuine alteration to the employment contract — a side letter or addendum is sufficient
The minimum wage must still be met after the sacrifice
Both parties must understand the impact on statutory pay (SMP, SSP) before agreeing

For the broader picture of salary sacrifice beyond pensions — including cycle to work and EV car schemes — see our salary sacrifice calculator. To work out standard auto-enrolment contributions on qualifying earnings, use the workplace pension calculator.

Salary Sacrifice Pension Calculator 2026/27

Pension Salary Sacrifice: The Most Efficient Way to Save for Retirement

Why Pension Sacrifice Beats a Personal Contribution

The Employer NI Saving — Pass It to the Employee's Pension

The £100,000 Tax Trap: Where Pension Sacrifice Saves Most

Setting Up Pension Salary Sacrifice

Frequently Asked Questions

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