New to this? Have a read of What is a pension? first. It covers the basics from scratch in a few minutes.
How salary sacrifice works
Normally, your pension contribution comes out of your pay. With salary sacrifice, you agree to change your employment contract so your salary is lower, and your employer pays that amount into your pension instead. The same money ends up in your pension. It just never reaches your payslip as salary.
Because you never receive it as pay, you don't pay Income Tax or National Insurance on it. The National Insurance saving is the main extra you get compared with a normal workplace pension contribution.
A worked example
Take a £30,000 salary in England, with 5% of qualifying earnings going into the pension. That's £99 a month either way. Here's how the month compares:
| Each month | Normal contribution | Salary sacrifice |
|---|---|---|
| Salary | £2,500.00 | £2,401.00 |
| Income Tax | £290.50 | £270.70 |
| National Insurance | £116.16 | £108.24 |
| Taken from pay for the pension | £79.20 | £0.00 |
| Take-home pay | £2,014.14 | £2,022.06 |
| Your contribution into the pension, including tax relief | £99.00 | £99.00 |
The same £99 goes into the pension, but take-home pay is £7.92 a month higher, or about £95 a year. That's the National Insurance you no longer pay. Some employers also add some or all of their own National Insurance saving to your pension, so it's worth asking whether yours does.
Try different salaries and pension types in our take-home pay calculator.
Things to check before you sign up
- Your pay can't drop below the National Minimum Wage. If you're on it or close to it, salary sacrifice may not be possible.
- Statutory pay can be lower. Payments such as Statutory Maternity Pay depend on your earnings, so a lower salary can mean you get less. Some employers work these out on your old salary, so ask.
- Mortgage applications. Some lenders look at your lower salary, which can reduce how much they'll lend.
- Other things linked to your salary. Life cover, bonuses and pay rises might be based on your new, lower salary. Your employer should tell you which one they use.
- It's a change to your contract. You usually can't switch it on and off whenever you like. Many employers only allow changes at set times, or after a big life event such as marriage or a partner's pregnancy.
It isn't just for pensions
Employers also use salary sacrifice for things like the Cycle to Work scheme, workplace nurseries and some electric car schemes. The tax savings vary from one benefit to another, so check how yours works before you sign up.
A change due in April 2029
From April 2029, the government plans to cap the National Insurance saving on pensions. Only the first £2,000 a year you sacrifice into a pension will be free of National Insurance. Above that, you and your employer will pay it as normal. Income Tax relief isn't affected, and the government says most people paying in typical amounts won't be affected.
Common questions
Does salary sacrifice reduce my pension?
No. The same amount goes into your pension. It can even go up, if your employer adds some of its National Insurance saving.
Can I stop salary sacrifice?
Yes, but because it's a change to your contract, you'll usually need to wait for a set window or a big life event. Ask HR or payroll how it works where you are.
Is salary sacrifice the same as a net pay pension?
Not quite. In a net pay scheme, your contribution is taken before Income Tax but after National Insurance. With salary sacrifice, it's taken before both, so you save a little more.
Sources
We checked this guide against these sources on 13 October 2026. Rules and allowances can change, so check the latest position before you act.
- GOV.UK: Salary sacrifice and the effects on PAYE
- GOV.UK: Changes to salary sacrifice for pensions from April 2029
- GOV.UK: Pension tax relief
- GOV.UK: National Insurance, how much you pay
This guide is general information, not personal financial advice. Read our full disclaimer.