How does it work?
You agree with your employer to reduce part of your contractual cash salary or bonus. In return, your employer pays that amount into your workplace pension. This is sometimes called salary exchange.
Because the sacrificed amount is no longer paid to you as cash earnings, payroll normally calculates Income Tax and employee National Insurance on the lower amount. Your employer must offer the arrangement and it must be set up correctly.
For the assumptions and calculations used by TaxOptions, see how the pension salary sacrifice calculator works.
Simple example
If you exchange £5,000 of salary, your contractual cash pay falls by £5,000 and your employer pays £5,000 into your pension. Your take-home pay normally falls by less than £5,000 because the sacrificed pay is not subject to Income Tax or employee National Insurance.
The exact result depends on the tax and National Insurance bands that apply to the sacrificed income.
How is it different from an ordinary pension contribution?
With an ordinary employee pension contribution, the contribution is taken from your pay and Income Tax relief is provided through the pension or payroll system. Employee National Insurance is usually still based on your earnings before that contribution.
With pension salary sacrifice, the contribution is made by your employer after you give up cash pay. Compared with an ordinary pension contribution that receives full Income Tax relief, the main additional personal saving is often employee National Insurance.
Your employer may add more
Your employer also pays less employer National Insurance when cash earnings fall. Some employers add some or all of that saving to the pension, while others retain it. Employer matching may add another benefit, subject to the scheme rules and any maximum match.
Ask your employer how matching works, whether bonuses can be sacrificed and whether any employer National Insurance saving is added to your pension.
Why adjusted net income matters
Pension salary sacrifice can reduce adjusted net income. This may affect the Personal Allowance taper above £100,000 and income tests for Tax-Free Childcare and certain free childcare schemes.
The relevant figure can include salary, bonuses, taxable employment benefits, rental profit, savings interest, dividends and other taxable income. Salary alone may not show whether you cross a threshold.
What should you check?
- Whether your employer offers pension salary sacrifice and which parts of your pay can be exchanged.
- How much take-home pay you need for regular costs and unexpected spending.
- How lower contractual pay could affect statutory pay, borrowing or employment benefits.
- Your total pension input and available annual allowance.
- Whether employer matching or National Insurance savings will be added to your pension.
- When pension rules allow you to access the money.
Official sources
- GOV.UK: What you, your employer and the government pay
- GOV.UK: Salary sacrifice and the effects on PAYE
- HMRC manual: Effective salary sacrifice
- GOV.UK: Adjusted net income
Explore your pension salary sacrifice options
Compare the estimated impact on take-home pay, tax and pension input at different levels.
Use the pension salary sacrifice calculatorNeed personalised advice?
A regulated financial adviser can consider your pensions, employer scheme, tax position and wider financial goals. They can help you decide whether a pension salary sacrifice level is suitable for you and how it fits into your longer-term plan.
After seeing your results, you can ask TaxOptions to look for a potential adviser match. We will ask for your permission before sharing your details.
Request a financial adviser