Salary sacrifice, properly explained
How giving up pay for a pension contribution saves both income tax and National Insurance, the employer's saving and whether it is passed on, the 60% zone where a contribution costs 38p in the pound, the side effects, and the £2,000 cap announced for 2029.
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Salary sacrifice is the cheapest way most employees will ever put money into a pension, and the least understood, because the saving comes from a tax nobody thinks about when they think about pensions: National Insurance.
How it works
You agree with your employer to a lower salary and they pay the difference into your pension as an employer contribution. Because the money was never your pay, it attracts neither income tax nor employee National Insurance (8% up to £50,270 and 2% above), and your employer saves their own 15% NI on it too. Worked through the Hundred Summers engine: on a £40,000 salary, sacrificing £4,000 saves £800 of income tax and £320 of NI, so £4,000 lands in the pension for a take-home cost of £2,880, and the employer saves £600. An ordinary relief-at-source contribution from net pay would have saved the £800 of tax but not the £320 of NI. The salary sacrifice calculator runs your own figures, including Scottish bands.
The employer’s saving
That 15% is the employer’s money to keep or share. Many pass some or all of it into the pension, which is the single best question to ask HR: a full pass-on turns the £4,000 above into £4,600 in the pension for the same £2,880 of take-home. Some employers do not offer sacrifice at all, and none can take you below the National Minimum Wage with it.
Where it is extraordinary
Between £100,000 and £125,140 the personal allowance taper makes the marginal income tax rate about 60%, plus 2% NI. A £10,000 sacrifice from a £110,000 salary saves £6,000 of tax and £200 of NI: £10,000 in the pension for £3,800 of take-home, before any employer pass-on. Sacrifice also restores child benefit lost to the £60,000–£80,000 charge, keeps a parent under the £100,000 childcare cliff, and reduces student loan repayments, which are 9% of pay above the threshold.
The side effects
Your contractual salary really is lower, and things keyed to it follow: mortgage affordability (some lenders add the sacrifice back, many do not), statutory maternity and sick pay, life cover expressed as a multiple of salary, and redundancy pay. Your State Pension is unaffected as long as pay stays above the lower earnings limit. And the future: the November 2025 Budget announced that from April 2029 salary-sacrificed pension contributions above £2,000 a year will attract employer and employee NI; the income tax saving stays, the NI saving above the cap goes. Until then the arithmetic above stands. The Hundred Summers Cashflow tab applies sacrifice in every projected working year rather than as a one-year snapshot, and from 2029/30 it charges NI on the part above £2,000, so the projection already reflects the change.
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