What salary sacrifice actually does to your pay
Salary sacrifice is a written agreement to give up part of your contractual salary in return for your employer paying the same amount into your pension. The money never counts as your earnings at all, so it is never taxed and it never attracts National Insurance. That second half is the whole point. A net pay or relief-at-source contribution saves you income tax and nothing else. A sacrificed contribution saves you income tax and National Insurance, at 8% on earnings between £12,570 and £50,270, and 2% above that.
Your employer saves as well, because it no longer pays employer National Insurance at 15% on the sacrificed amount. On a £5,000 sacrifice that is £750 a year the employer keeps. Some employers add part or all of that saving to your pension; most keep it. Which of those your employer does is the highest-value question in this entire subject, and it is worth asking your payroll or human resources team directly, because it changes the outcome more than almost anything else on the form above.
The same contribution, two different costs
Every row below puts 5% of salary into a pension and changes nothing but the mechanism. The employer keeps its own National Insurance saving in these figures, which is the common case. They are worked out at build time by the same engine as the planner above, on the 2026/27 rates, for someone in England, Wales or Northern Ireland with no student loan.
| Salary | Into the pension | Cost to your take-home | Effective relief | Sacrifice beats net pay by |
|---|---|---|---|---|
| £30,000 | £1,500 | £1,080 | 28% | £120 |
| £45,000 | £2,250 | £1,620 | 28% | £180 |
| £60,000 | £3,000 | £1,740 | 42% | £60 |
| £90,000 | £4,500 | £2,610 | 42% | £90 |
| £125,000 | £6,250 | £2,375 | 62% | £125 |
The last column is smaller than people expect, and the two before it are much larger. What salary sacrifice adds over a net pay arrangement is precisely the National Insurance on the contribution and nothing else: 8% of it below £50,270 and 2% above. Both methods give identical income tax relief and both reduce adjusted net income identically, which is why the £125,000 row gains no more proportionally than the £90,000 one despite sitting inside the 60% tax trap.
The effective relief column is where the real money is. At £30,000 the pension costs you 72% of what goes in. At £125,000, where every pound of contribution restores 50p of withdrawn personal allowance as well as saving 40% tax, it costs you only 38%. That difference has nothing to do with which mechanism you use and everything to do with where your salary sits, which is the argument for checking the thresholds below before settling on a percentage. A relief-at-source pension ends up alongside the net pay column, but only once the higher-rate part of the relief has been claimed back from HM Revenue and Customs, which is a step a great many people never take.
The salary thresholds that matter more than the tax rates
Most of the value in a calculation like this is not in the headline rates. It is in the handful of income thresholds where something falls off a cliff, because a modest pension contribution can carry you back over the edge and be worth several times its face value.
| Threshold | What happens when you cross it |
|---|---|
| £50,270 | Employee National Insurance drops from 8% to 2%. Above this point salary sacrifice still saves income tax at 40%, but the National Insurance advantage over the other methods shrinks to almost nothing. |
| £60,000 | The High Income Child Benefit Charge begins. You repay 1% of the family’s Child Benefit for every £200 of adjusted net income above this, so it is fully clawed back by £80,000. With two children the effective marginal rate through that stretch is over 60%. |
| £100,000 | Two things happen at once. Tax-Free Childcare and the funded hours stop completely if either parent goes over, with no taper at all, and the personal allowance starts to be withdrawn at £1 for every £2 earned. For a family using childcare support, going a single pound over can cost thousands. |
| £125,140 | The personal allowance reaches zero. Between £100,000 and here, every extra £100 of pay is taxed at an effective 60%, or about 69.5% in Scotland. This stretch is what people mean by the 60% tax trap. |
All three cliff edges are measured on adjusted net income, not on your salary. Salary sacrifice and net pay contributions reduce it automatically because the money never forms part of your taxable pay. Relief-at-source contributions reduce it too, but only once you have told HM Revenue and Customs about them. The planner works out how much extra you would need to sacrifice to get back under whichever threshold is nearest, which is usually the quickest way to see whether the exercise is worth doing at all.
When salary sacrifice is the wrong answer
It is not free, and the costs do not appear anywhere on a payslip. Any of the following can outweigh the tax saving.
- Mortgage borrowing. Lenders assess you on your reduced contractual salary. Sacrificing 10% can cut what you are able to borrow by roughly the same proportion. Some lenders will add the contribution back if you ask; many will not.
- Statutory parental and sick pay. These are worked out from your earnings after sacrifice, so a large sacrifice during the reference period reduces them. Some employers pause sacrifice around parental leave; they are not obliged to.
- Redundancy pay and life cover. Both are commonly defined as a multiple of salary. A well-drafted scheme uses a notional or reference salary that ignores the sacrifice, which protects you. Check which yours uses before you increase the percentage.
- The National Minimum Wage. Sacrifice cannot take your pay below it, which is £12.71 an hour for people aged 21 and over from April 2026. Payroll will cap the arrangement rather than break the law, so this binds first on lower salaries and longer hours.
- The annual allowance. Everything paid in, including the employer contribution and anything it passes on, counts towards £60,000 a year. Unused allowance from the previous three years can cover an overshoot; otherwise the excess is taxed and the benefit disappears.
- Access. Pension money cannot normally be touched until 57 from 2028. Sacrificing more than you can comfortably lock away for that long is the most commonly regretted decision in this area.
The £2,000 cap arriving in April 2029
The Autumn Budget in November 2025 announced that from 6 April 2029, only the first £2,000 a year of salary-sacrificed pension contributions will keep the National Insurance saving. Anything above that will be charged employee and employer National Insurance as though it were ordinary pay. Income tax relief is untouched, so sacrifice above the cap ends up worth roughly what a net pay arrangement is worth today, rather than worth nothing.
Three years is a long time in tax policy and the rule may yet be changed before it starts. What it does mean is that the tax years between now and April 2029 are unusually favourable ones for large sacrifices, and that anyone budgeting on the National Insurance saving continuing indefinitely should check the figures again. Tick the box in the advanced options above to apply the cap to your own numbers and see the size of the difference.
Mistakes that come up again and again
- Assuming you know which arrangement you are on. Employers rarely spell it out. If the gross pay on your payslip is lower than the salary in your contract, it is sacrifice. If a pension line appears before the tax calculation, it is net pay. If it comes out after tax and your provider adds 25% to what you paid, it is relief at source.
- Never claiming higher-rate relief on a relief-at-source pension. The provider only ever reclaims the basic rate. If you pay tax at 40% or 45%, the remainder has to be claimed through Self Assessment or a tax code change. HM Revenue and Customs does not do it for you, and large numbers of people never claim it at all. The planner shows the amount to claim.
- Reading the employer percentage as a match. Some employers match what you pay, some contribute a fixed percentage whatever you do, and some pay only the auto-enrolment minimum of 3%. Only a genuine match is actually forfeited by contributing less.
- Sacrificing to land exactly on a threshold. A bonus, overtime, a mid-year pay rise or a company car can push adjusted net income back over. Leaving a margin costs less than the charge does.
- Forgetting the other parent. The childcare income limit applies to each parent separately, so one parent going over withdraws the support for the whole household, however little the other earns.
- Expecting the payslip to match to the penny. Payroll works period by period with its own rounding rules, and your tax code may not be the standard one. A difference of a few pounds either way is normal.
Questions people ask
Is salary sacrifice always better than the other two methods?
For take-home pay, almost always: it is the only method that saves National Insurance as well as income tax, so for the same money into your pension you keep more. The exceptions are not about tax at all. Sacrifice lowers your contractual salary, which is the figure mortgage lenders, statutory maternity and sick pay, redundancy calculations and death-in-service cover usually work from. It also cannot take your pay below the National Minimum Wage. If any of those matter to you in the next year or two, a net pay arrangement can leave you better off overall even though it shows a smaller number on this page.
Does salary sacrifice reduce my State Pension?
Only in an unusual case. You build up a qualifying year towards the State Pension by earning above the lower earnings limit, not by paying a particular amount of National Insurance, so a sacrifice that leaves your pay comfortably above that limit costs you nothing. The risk is only for people on low pay or reduced hours whose pay after sacrifice would drop near that floor. It also has no effect on how much State Pension you have already built up.
Can my employer refuse to offer salary sacrifice, or stop it later?
Yes to both. Salary sacrifice is voluntary for the employer, it needs a contract variation, and it creates payroll work, so plenty of smaller employers do not offer it. An employer can also withdraw the arrangement, usually with notice, and most schemes let you opt out at a life event such as a birth, a house move or a change in hours. Because it changes your contract, it is worth having the terms in writing, including what happens to the arrangement if you go on unpaid or reduced-pay leave.
Does paying into a pension reduce my student loan repayments?
Salary sacrifice does, because repayments are worked out on the same earnings as National Insurance and the sacrificed pay is not part of them. A net pay arrangement does not, and neither does relief at source, even though both reduce your income tax. On a Plan 2 loan that is 9% of the sacrificed amount, which is often larger than the National Insurance saving above the upper earnings limit. Tick your plan in the advanced options to see it.
Does salary sacrifice affect how much I can borrow for a mortgage?
Usually yes. Most lenders assess affordability on your contractual salary, and after sacrifice that is a smaller number. Some lenders will add the pension contribution back on if you ask and provide payslips, and some will not. Unwinding a long-standing sacrifice a month before an application is a common idea and a poor one, because lenders look at recent payslips and at whether the increase is sustainable. Planning around a mortgage application a year ahead is the workable version.
What happens to salary sacrifice while I am on maternity or paternity leave?
Statutory maternity, paternity, adoption and shared parental pay are all calculated from average earnings in a set reference period, and those earnings are your pay after sacrifice, so a large sacrifice during the reference period reduces the statutory payment. Separately, an employer must keep paying its pension contribution at the pre-leave rate throughout paid statutory leave even though your own pay has dropped. Many employers pause sacrifice around parental leave for exactly this reason; the rules do not oblige them to, so it is worth asking before the reference period starts rather than after.
Is there a right amount to put in?
There is no single answer and this site does not give advice, but three mechanical facts narrow it down. Contributing less than the level your employer will match gives away money that costs you nothing to claim. Everything paid in by you and your employer together counts against the £60,000 annual allowance, and going over it triggers a tax charge that cancels the benefit. And a contribution that carries your adjusted net income back under £100,000 or £60,000 can be worth far more than the headline tax relief. Beyond that it is a question of what you can afford to lock away until at least 57.
Can I change my mind once I have started?
You can normally change the percentage at the intervals your scheme allows, often monthly or at renewal, and stop altogether at a recognised life event. What you cannot do is get sacrificed pay back afterwards: it has already gone into the pension and pension money is locked until at least 57 from 2028. This is why the National Minimum Wage floor and your own short-term cash needs are worth checking before you set the figure rather than after.
This planner is general information, not financial advice, and it covers employment income only. Pension and tax decisions depend on your own circumstances. For anything significant, speak to your payroll team, HM Revenue and Customs, the free government-backed service MoneyHelper, or a regulated financial adviser. The full method, every rule the planner applies and the source for every figure are set out on the how the planner works page.