What is salary sacrifice?

Salary sacrifice is a tax-efficient way for you to make pension contributions. It allows you to give up some of your gross salary in exchange for a non-cash benefit such as an employer contribution. Any National Insurance (NI) and income tax savings can be used to help increase the pension contributions being paid, or for your take-home pay to be increased.

Salary sacrifice may not be suitable or may only have a minimal benefit for employees with low earnings. HM Revenue & Customs (HMRC) guidance also states that a salary sacrifice arrangement must not reduce an employee's cash earnings below National Minimum Wage rates.

The examples below show you how this works.

You won’t pay tax and NI on the amount you sacrifice, so you can either:
- increase your level of contribution with no impact on your take-home pay, increasing the size of your fund or
- keep the same level of pension contribution while increasing your take-home pay.
Your employer will also save on their NI payments and might share these savings to increase your contributions even further.
It’s easy for you, as your employer makes all the arrangements.

Salary sacrifice is a formal, agreed change to your contractual terms and conditions. You can normally change the amount you sacrifice – increase or decrease the amount. However, your employer may have rules around when you can do this, for example if you have a relevant ‘lifestyle event’ such as getting married. You can also opt out of salary sacrifice at any time.

Salary sacrifice isn’t always suitable for everyone. You should think about:

The impact on any other benefits that are linked to salary, for example sick pay, working tax credit/child tax credit, the State Pension, death benefits or overtime, although it's still possible for an employer to use a 'notional' or pre-sacrifice salary for these benefits.
Mortgage lending that may be linked to actual salary received.
Statutory benefits which may be affected by a reduction in salary, for example statutory maternity and paternity pay.

The value of the reduction in tax and National Insurance will depend on your individual circumstances, and could change.

The value of an investment can fall as well as rise and isn't guaranteed. The final value of your pension pot when you come to take benefits may be less than has been paid in.

If you want more information on the suitability of salary sacrifice, you should get professional financial advice - there may be a charge for this.

Let’s look at an employee subject to UK tax with a gross salary of £24,000 in the 2025/26 tax year.

Before salary sacrifice

Making a personal contribution of £960 (net), a year into their plan.

Which after tax relief from the government, of 20%, is added, is a gross employer contribution of £1,200.

And their take-home pay is £19,611.

£24,000
Gross salary

£3,429
Income Tax and NI*

£960
Personal contributions (net)

£19,611
Take-home pay

£1,200
Pension contribution

Saving with salary sacrifice

They choose to give up £1,371.42 of their gross salary and, in exchange, their employer pays the increased amount of £1,371.42 into their plan, as an employer contribution.

Their take-home pay is not affected and stays at £19,382.40.

£22,628.58
Gross salary

£3,017.58
Income Tax and NI*

Nil
Personal contributions (net)

£19,611
Take-home pay

£1,371.42
Pension contribution

Boost take-home pay

In this example, the employee chooses to keep their pension contribution of £1,200 the same (as it was without salary sacrifice).

And use salary sacrifice to boost their take-home pay to £19,731.

£22,800
Gross salary

£3,069
Income Tax and NI*

Nil
Personal contributions (net)

£19,731
Take-home pay

£1,200
Pension contribution

These examples are based on our understanding of current taxation law and HMRC practice, which may change.

These amounts shown are only examples and aren’t guaranteed.

So by saving with salary sacrifice they’ve increased:

Their pension contribution to £1,371.42 (increase of £171.42) while maintaining their take-home pay of £19,731 or
Their take-home pay to £19,731 (increase of £120) while maintaining a pension contribution of £1,200.

The contributions before sacrifice are paid as employee contributions but these change to employer contributions after sacrifice.

*These figures are based on the tax and National Insurance rates for the 2025/26 tax year. In these examples, none of the employer NI saving is added to the pension contribution after sacrifice.

Your employer won’t pay employer’s NI on the salary you give up and may choose to share the savings with you by increasing how much it contributes to your pension.

If your employer is passing on any of their NI saving, let’s look at how this may also increase contributions to your pension. This example is based on them passing on all 13.8% of their NI saving as well as making an employer contribution of £1,200 a year.

£1,371.42
Pension contribution with salary sacrifice

£1,200
Employer contribution

£189.26
Employer NI saving

£2,760.68
Total pension contribution
(an increase of £360.68**)

The amount of NI saving your employer shares is entirely at their discretion and they may change it at any time, for example in response to changes to employer NI rates or changes to HMRC rules governing salary sacrifice. If there are any changes, they’ll let you know.

**Compared with contributions before salary sacrifice.

Important notes

These examples are based on our understanding of current taxation law and HMRC practice, which may change.
The amounts shown are only examples and aren’t guaranteed.
The value of any tax relief will depend on individual circumstances.

Looking for more help?

Our customer support has a range of topics with answers to help you, if you still require further assistance you can also find out how to get in touch.

Support

How could salary sacrifice benefit me?

Can I change the amount of salary I want to sacrifice?

Things to consider

How it works

Employer National Insurance savings

Important notes

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