What is a salary sacrifice pension?
What is a Salary Sacrifice Pension?
Salary sacrifice can be a way to increase pension saving and, under current rules, reduce some tax and National Insurance. It is an arrangement with your employer, and not every employer offers it.
Understanding Salary Sacrifice
Salary sacrifice is an employment arrangement, not a standalone government scheme. You agree to reduce contractual cash pay and your employer provides a non-cash benefit — in this case an employer pension contribution. Under current rules, this can reduce the pay on which Income Tax and National Insurance are calculated, subject to the arrangement and wider pension limits.
How Does a Salary Sacrifice Pension Work?
You agree with your employer to exchange part of your salary or bonus. Instead of paying that amount as cash, your employer pays it into your workplace pension. Under current rules this can reduce employee and employer National Insurance, although your employer decides whether to share any of its saving.
Why Choose a Salary Sacrifice Pension?
Boost Your Pension Pot
The primary appeal is growing your retirement savings faster. With salary sacrifice, what might appear as a cut in your take-home pay is reinvested into your pension. This gives your pension pot a nice boost, thanks to larger contributions from your employer.
Tax and National Insurance Savings
Under the rules in force in 2026/27, salary exchanged for an employer pension contribution is generally not charged to Income Tax or employee and employer National Insurance. From April 2029, only the first £2,000 a year of employee pension contributions made through salary sacrifice will remain exempt from National Insurance; amounts above that are due to face employee and employer National Insurance. Pension contributions will remain exempt from Income Tax subject to the usual limits, and employer contributions outside salary sacrifice will remain free of National Insurance.
Things to Consider
Effects on Borrowing Power
While there are great benefits, there are some considerations. Credit providers often look at your salary when deciding how much you can borrow. Reducing your salary might impact things like mortgage approvals.
Impact on Earnings-Related Benefits
Lowering your salary could also affect other benefits tied to your earnings. This might include life insurance coverage or statutory maternity pay.
Conclusion
Salary sacrifice can be useful, but the result depends on your employer’s arrangement, your pay and the tax rules in force. Check how it would affect take-home pay, benefits and borrowing, and discuss the details with your employer.
