Key facts
- £2,000 of pension salary sacrifice costs £1,440 in take-home for basic rate, £1,160 for higher rate and £1,060 for additional rate
- Combined income tax and NI saving: 28% basic, 42% higher and 47% additional rate in 2026/27
- Your employer saves 15% employer NI on the sacrificed amount and may pass it into your pension
- From 2029/30, pension salary sacrifice above £2,000 a year loses its NI exemption
See how the sacrificed amount changes your payslip in how to read your payslip guide, and how the bands work in income tax bands guide and National Insurance rates guide.
| Tax band | Tax and NI saved | £2,000 in your pension costs you |
|---|---|---|
| Basic rate (20% tax, 8% NI) | 28%, £560 | £1,440 |
| Higher rate (40% tax, 2% NI) | 42%, £840 | £1,160 |
| Additional rate (45% tax, 2% NI) | 47%, £940 | £1,060 |
Your employer also saves 15% employer NI and may add it to your pension. Source: WhatsUK calculation, 2026/27 rates, 16 June 2026.
One change to plan for: from the 2029/30 tax year, pension salary sacrifice above £2,000 a year will lose its National Insurance exemption, announced in the Autumn 2025 Budget. For 2026/27 the full exemption still applies at any level, so the savings shown here stand, but high sacrificers should keep the 2029 cap in mind for the future.
Salary sacrifice feeds your workplace pension, explained in pension auto enrolment guide, where contributions then compound as shown in compound interest guide and our long-term wealth compounding guide. For how pension tax relief and the annual allowance work, see our pension tax relief guide.
How Salary Sacrifice Works in Practice
Under a salary sacrifice arrangement, you and your employer formally agree to reduce your contractual salary by a set amount. Your employer then makes a contribution of that amount directly to the benefit (most commonly your pension). Because your gross pay on the payslip is now lower, both income tax and National Insurance are calculated on the reduced figure.
This is fundamentally different from a standard employee pension contribution, where your full salary is taxed and you receive tax relief on the pension separately.
| Contribution Type | Income Tax Saving | NI Saving | Payslip Gross |
|---|---|---|---|
| Salary sacrifice | Yes, at marginal rate | Yes, 8% or 2% | Reduced |
| Relief at source | 20% via HMRC top-up | No | Unchanged |
| Net pay arrangement | Yes, at marginal rate | No | Reduced |
The salary sacrifice method is consistently the most tax-efficient option for most employees, particularly those paying the higher or additional rate of income tax. See the Salary Sacrifice Calculator to model your specific savings.
Real-Money Savings: What Salary Sacrifice Saves You
| Annual Salary | Monthly Sacrifice | Income Tax Saved | NI Saved (8%) | Total Monthly Saving | Net Cost of Sacrifice |
|---|---|---|---|---|---|
| £28,000 | £200 | £40 | £16 | £56 | £144 |
| £35,000 | £200 | £40 | £16 | £56 | £144 |
| £55,000 | £200 | £80 | £4 (2%) | £84 | £116 |
| £70,000 | £200 | £80 | £4 (2%) | £84 | £116 |
NI saving shifts from 8% to 2% above £50,270 annual earnings. Higher earners save substantially more in income tax.
The Employer NI Saving: A Powerful Negotiation Tool
Employers also save National Insurance when employees use salary sacrifice. From April 2026, employers pay 15% NI on earnings above £5,000. When an employee sacrifices £2,400 per year (£200/month) into their pension, the employer saves 15% on that amount: £360 per year.
Many employers pass some or all of this saving back to the employee as an enhanced pension contribution. This is a legitimate and common practice. Before agreeing to a salary sacrifice arrangement, ask your HR or payroll team whether the employer NI saving is shared.
Expert Tip
When negotiating a new job offer or reviewing your existing pension arrangement, ask specifically: "Does the company pass back the employer NI saving from salary sacrifice?" Some employers add the full 15% saving to your pension pot. On a £5,000 annual sacrifice, that is an extra £750 per year going into your pension at no additional cost to you.Salary Sacrifice Calculator
Enter your gross salary and sacrifice amount to see your new take-home pay, tax and NI savings, and the total pension contribution including any employer NI top-up. Updated for 2026/27.
What Can Be Salary Sacrificed?
The most common benefits available through salary sacrifice in the UK:
| Benefit | Tax and NI Saving | Notes |
|---|---|---|
| Pension contributions | Full income tax and NI saving | Most common use |
| Electric vehicle (EV) lease | Tax on benefit-in-kind, not full salary | Very tax-efficient for EVs specifically |
| Cycle to Work scheme | Full income tax and NI saving | Capped rules apply |
| Childcare vouchers | NI saving (closed to new entrants 2018) | Existing members still benefit |
| Health screening | Income tax and NI saving | Less common, employer dependent |
Electric vehicle salary sacrifice has become particularly popular because the benefit-in-kind charge on zero-emission cars is only 2% for 2026/27, making an EV available at significantly lower effective cost compared to buying or leasing privately. See our Company Car Tax guide for how benefit-in-kind is calculated and why electric cars sit in the lowest band.
The Mortgage Affordability Problem
The most significant practical downside of salary sacrifice for pensions is the impact on mortgage affordability. When you apply for a mortgage, lenders assess your affordability based on your nominal contractual salary, not your total compensation package. If you salary sacrifice £6,000 per year, your nominal salary is £6,000 lower on paper, even though your take-home pay is actually higher than if you had contributed via relief at source.
Example: An employee earning £50,000 who sacrifices £6,000 has a contractual salary of £44,000. Some mortgage lenders assess borrowing capacity at 4.5x salary. At £50,000 nominal, the maximum mortgage is £225,000. At £44,000 nominal, it drops to £198,000. A difference of £27,000 in potential borrowing capacity.
If you are planning to apply for a mortgage within the next 12 months, consult a mortgage broker before increasing your salary sacrifice contribution. Some lenders will take the actual employment income into account. Others strictly use the reduced contractual figure. Use the Mortgage Calculator to model different borrowing amounts.
The 2029 Salary Sacrifice NI Cap: What Was Announced
The Autumn Budget 2025 confirmed that from April 2029, National Insurance will be payable on salary sacrifice pension contributions above £2,000 per year. This means:
- Contributions up to £2,000/year remain fully NI-exempt
- Contributions above £2,000/year will attract employee and employer NI from April 2029
- The change does not affect income tax relief, only NI
For context: a basic rate employee currently sacrificing £5,000/year saves approximately £240 in NI (8% on the £3,000 above the new cap). From April 2029, that NI saving on amounts above £2,000 will be removed. Employees sacrificing large amounts into their pensions have until April 2029 to maximise contributions under the current rules. The income tax saving remains intact regardless.
Reducing the £100,000 Personal Allowance Trap Through Salary Sacrifice
For employees earning between £100,000 and £125,140, salary sacrifice is the single most powerful tax-reduction tool available. Every pound of salary sacrificed reduces adjusted net income, restoring the personal allowance that is otherwise withdrawn at the effective 60% marginal rate in this band.
An employee earning £110,000 who sacrifices £10,000 into a pension reduces adjusted net income to £100,000. This restores the full £12,570 personal allowance, saving £5,040 in income tax (40% on the restored £12,570) plus £800 in NI (2% on £10,000 above the upper earnings limit), a combined saving of approximately £5,840 on a £10,000 sacrifice. The effective cost of the £10,000 pension contribution is just £4,160.
See the Income Tax Calculator to model different salary sacrifice scenarios for your income level.
Related Calculators
Frequently Asked Questions
It saves the income tax and National Insurance you would have paid on the sacrificed amount. A basic-rate taxpayer saves 28%, so £2,000 in the pension costs £1,440 in take-home pay. A higher-rate taxpayer saves 42% and an additional-rate taxpayer 47%. Your employer also saves 15% and may add it to your pension.
Usually yes, because of National Insurance. Under relief at source a basic-rate taxpayer pays £1,600 net for £2,000 in the pension, but salary sacrifice costs only £1,440 for the same £2,000, since it also avoids the 8% employee National Insurance. The gap is wider if your employer passes on their NI saving.
From the 2029/30 tax year, pension salary sacrifice above £2,000 a year will no longer be exempt from National Insurance, under a measure announced in the Autumn 2025 Budget. For 2026/27 the full exemption still applies, so salary sacrifice remains one of the most tax-efficient ways to pay into a pension for now.
It can. Salary sacrifice lowers your contractual gross salary, and lenders base mortgage affordability on that lower figure, so heavy sacrifice may reduce how much you can borrow. Some lenders add pension contributions back, but not all. If you are about to apply for a mortgage, check how your lender treats it first.
It can. If your workplace pension is a defined benefit (final salary) scheme, your pension entitlement may be calculated on your reduced contractual salary rather than the original. Check with your pension scheme before sacrificing. Most modern pensions are defined contribution, where this is not a concern.
Yes. Statutory Maternity Pay (SMP) and Statutory Paternity Pay (SPP) are calculated on your average earnings in a reference period. A lower contractual salary can reduce your statutory entitlement. Consider pausing or reducing salary sacrifice during the relevant reference period.
Yes. Salary sacrifice is a contractual arrangement that requires employer agreement. Your employer is not legally required to offer it, though most medium and large employers do for pension contributions.
Under net pay, your pension contribution is deducted from gross pay before income tax, so you save income tax at your marginal rate. Under salary sacrifice, you also save NI, making it more beneficial. Both are different from relief at source, where contributions come from net pay and HMRC tops up by 20%.
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James Hartley is a Chartered Management Accountant (CIMA) with more than eight years of experience in UK tax, payroll and compliance. He holds a BSc in Finance and Economics from the University of Manchester and spent his early career at a Big 4 accounting firm. He founded WhatsUK to build free UK financial calculators and guides verified against official HMRC sources. He authors every calculator and article on WhatsUK.
Sources & Official References
- HMRC: Salary sacrifice and the effects on PAYE- Official guidance on salary sacrifice arrangements
- GOV.UK: Pensions and auto-enrolment- Workplace pension rules and minimum contributions
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Disclaimer: This calculator provides estimates based on standard HMRC rates for 2026/27. Results may vary based on individual circumstances. This is not financial advice. Always consult a qualified accountant or CIMA-qualified financial adviser for personal tax matters.