Salary sacrifice saves you both income tax and National Insurance — but how much exactly? Here is a complete breakdown with worked examples for different income levels.
Salary sacrifice (sometimes called salary exchange) is an arrangement where you agree to reduce your contractual salary, and your employer pays the difference directly into your pension. Because the sacrifice happens before tax and National Insurance are calculated, you save both — unlike personal pension contributions which only save income tax.
It is not a tax loophole. It is an HMRC-approved arrangement that has been available for decades. Most large employers offer it, and many actively encourage it because they save employer NI too.
The key distinction: with a personal pension contribution, you earn your full salary, pay tax and NI, then contribute to your pension (and claim tax relief back). With salary sacrifice, your salary is reduced first, so you never pay tax or NI on the sacrificed amount in the first place.
The savings depend on your income level and how much you sacrifice. Here are worked examples for 2025/26:
£50,000 salary, £5,000 sacrifice: Personal contribution: saves £2,000 tax (40%). Cost to you: £3,000. Salary sacrifice: saves £2,000 tax + £400 NI (8%). Cost to you: £2,600. Extra saving: £400/year.
£80,000 salary, £10,000 sacrifice: Personal contribution: saves £4,000 tax. Cost: £6,000. Salary sacrifice: saves £4,000 tax + £200 NI (2%). Cost: £5,800. Extra saving: £200/year.
£120,000 salary, £20,000 sacrifice (into 60% trap band): Personal contribution: saves ~£8,600 tax (60% effective). Cost: £11,400. Salary sacrifice: saves ~£8,600 tax + £400 NI. Cost: £11,000. Extra saving: £400/year + potential employer NI passthrough.
When you sacrifice salary, your employer also saves NI on the amount sacrificed. Employer NI is 15% from April 2025, so on a £10,000 sacrifice, your employer saves £1,500.
Many employers pass some or all of this saving into your pension. If your employer passes through the full amount, a £10,000 sacrifice could result in £11,500 going into your pension — £1,500 of free money you would never get with a personal contribution.
Ask your HR department: "Does the company pass on the employer NI saving from salary sacrifice to my pension?" The answer makes a significant difference to the total value.
Salary sacrifice is particularly powerful for earners in the 60% trap band (£100,000–£125,140). Because the sacrifice reduces your gross salary directly, it reduces your adjusted net income — which is what HMRC uses to calculate the personal allowance taper.
If you earn £120,000 and sacrifice £20,000, your adjusted net income drops to £100,000. Your full personal allowance is restored, saving you approximately £5,028 in additional tax from the taper alone — on top of the normal 40% tax relief.
This is why financial advisers consistently recommend salary sacrifice as the number one action for anyone earning over £100k. Use our 60% trap analysis tool to see the exact numbers for your salary.
If you earn between £60,000 and £80,000, you face the High Income Child Benefit Charge. You repay 1% of child benefit for every £200 of income over £60,000, with full repayment at £80,000.
Salary sacrifice reduces your adjusted net income. If you earn £70,000 and sacrifice £10,000 into your pension, your adjusted net income drops to £60,000 — completely eliminating the child benefit charge. For a family with two children, this preserves approximately £2,075 per year in child benefit.
Combined with the tax and NI savings on the sacrifice itself, this makes salary sacrifice exceptionally valuable for parents in the £60k–£80k range.
Minimum wage floor: Your post-sacrifice salary cannot fall below the National Minimum Wage (£12.21/hour from April 2025 for age 21+). Your employer will enforce this automatically.
Mortgage applications: Lenders typically look at your contractual (post-sacrifice) salary. A £100,000 salary with £20,000 sacrifice shows as £80,000. Some lenders allow you to use the pre-sacrifice figure — ask your mortgage broker. If you are planning to remortgage soon, consider timing the sacrifice setup carefully.
Maternity and sick pay: Statutory pay is calculated on your post-sacrifice salary. If your employer only pays statutory minimums, salary sacrifice could reduce your maternity or sick pay. Many employers pay enhanced rates based on your pre-sacrifice salary — check your contract.
Life insurance and death-in-service benefits: These are typically calculated as a multiple of salary. Check whether your employer uses pre- or post-sacrifice salary for these calculations.
Important: The government has announced a cap on salary sacrifice NI savings of £2,000 per year from April 2029. Until then, there is no cap — maximise it now while the full saving is available.
Step 1: Check if your employer offers salary sacrifice for pension. Contact HR or your benefits portal.
Step 2: Decide how much to sacrifice. Use our calculator to model different amounts and see the impact on your take-home pay.
Step 3: Complete the paperwork. This is usually a simple form or online request. Your employer will amend your contract to reflect the lower gross salary.
Step 4: Verify on your next payslip. Your gross salary should be lower, but your take-home pay should be higher (or similar, with more going into your pension).
Step 5: Check your pension contributions are arriving correctly via your pension provider's portal.
Here is the complete comparison for a £100,000 earner contributing £20,000:
Personal pension contribution: You earn £100,000. Pay 40% tax and 2% NI. Contribute £20,000 net. Provider claims £5,000 basic-rate relief (total £25,000 in pension). You claim additional £5,000 relief via self-assessment. Net cost: £15,000. Pension receives: £25,000.
Salary sacrifice: Your salary is reduced to £80,000. You pay tax and NI on £80,000 only. Employer puts £20,000 into your pension. You save the NI you would have paid on the £20,000 (2% = £400). If employer passes on their NI saving (15% = £3,000), pension receives: £23,000. Net cost: approximately £14,600.
With employer NI passthrough, salary sacrifice puts up to £23,000 in your pension for a net cost of £14,600 — versus £25,000 via personal contribution at a net cost of £15,000. The personal contribution puts slightly more in the pension, but salary sacrifice costs you less out of pocket. Run both scenarios in our strategies tool to see the exact figures for your income.
Can I change my salary sacrifice amount? Usually yes, at set intervals (often annually or quarterly). Some employers allow changes at any time. Check your scheme rules.
Does salary sacrifice affect my student loan repayments? Yes — student loan repayments are based on your gross salary, which is reduced by salary sacrifice. This means lower repayments, but your loan takes longer to pay off. See our student loan guide for more detail.
Can I sacrifice my entire salary above minimum wage? In theory, yes. In practice, your employer may set limits. The pension annual allowance (£60,000) also applies to all contributions including employer contributions from salary sacrifice.
What happens if I leave my employer? Your salary sacrifice arrangement ends when you leave. Any contributions already made to your pension remain yours. Your new employer may offer their own scheme.