Salary sacrifice pensions

Just when you thought you had the different types of pension nailed, along comes yet another bit of jargon: salary sacrifice pensions. They’re essentially a way of saving into a workplace pension that reduces your official salary, but could boost your take-home pay. If this sounds perplexingly contradictory, fear not – we’ve got your back. Read on to find out how they work, whether you can get one and whether a salary sacrifice pension is right for you.

What is a salary sacrifice pension?

A salary sacrifice pension is a type of workplace pension that lets you “sacrifice” part of your salary, so that your official level of pay is lower, in exchange for other benefits – in this case a pension. The portion of your salary that you’ve sacrificed is instead paid into your workplace pension by your employer.

Typically, the amount of your salary that you sacrifice is equivalent to the contributions that you would have made into your workplace pension pot in any case. Under the government’s pension auto enrolment rules, for example, this would typically be 5%.

Let’s say your starting salary was £30,000. Under a salary sacrifice scheme, your official salary would reduce by £1,500 (5% of £30,000) to £28,500. Your employer would pay the £1,500 you’ve sacrificed into your pension pot. This would be in addition to your employer’s own contribution (at least 3% of your salary under auto enrolment rules).

At first glance, paying into a pension via salary sacrifice may seem very similar to the regular way of paying into a workplace pension. But, in reality there are some crucial differences that could make salary sacrifice a better option for many people.

How does a salary sacrifice pension work?

The percentage of your salary that is paid into a workplace pension may vary depending on the scheme, but let’s stick with the standard auto enrolment percentages to keep things simple.

Under a standard auto enrolment pension, you would pay 5% of your total salary into your pension and receive tax relief on your payments. If you’re a basic-rate taxpayer, tax relief would be paid at 20%. Your employer would pay an additional 3% of the value of your salary, adding up to the total of 8% as required under auto enrolment rules.

While you don’t pay income tax on the money paid from your salary into a regular workplace pension, you do pay National Insurance on your full salary. That includes any money that is then transferred into your pension.

With a salary sacrifice pension scheme, your official salary is reduced by the amount that you would have contributed under regular pension rules. The idea is that your employer then contributes the 5% you would have paid, plus its own 3%.

Because your pension contributions aren’t technically coming out of your salary, as a result, you don’t pay either tax or National Insurance on them. However, while the tax relief is automatically applied to your pension pot, this doesn’t apply to the National Insurance savings. With the National Insurance savings you can either:

• Use them to benefit from higher take-home pay. This is commonly known as “simple salary sacrifice”.
• Contribute the extra amount saved into your pension, to boost your total pot, commonly known as “SMART salary sacrifice”. In this scenario, your take-home pay would be the same as with a regular pension scheme.

Does salary sacrifice affect tax and National Insurance contributions?

Yes. The calculations for this can be a bit complicated and depend on your salary, your pension contributions and how your specific salary sacrifice scheme works. This includes whether it’s a simple or a SMART salary sacrifice scheme, as we’ve outlined above. There are calculators online that can help, though – just search for “salary sacrifice calculator”.

We used one such calculator to work out the difference in National Insurance contributions and take-home pay for someone earning £30,000 and paying into a pension via simple salary sacrifice vs a standard pension. For both scenarios, we’ve assumed a total pension contribution of 8%. In this scenario, the amount of income tax payable is the same in both scenarios. But you’d pay less National Insurance with the salary sacrifice option, resulting in about £120 more in take-home pay per year.

Simple salary sacrifice vs standard pension: Difference in take-home pay

Figures are based on income tax and National Insurance rates for 2024-25. Please note: the figures above are estimates based on a very specific scenario and using standard assumptions. There are many variables that could affect these figures in real life.

* Under a standard pension, pension contributions include employee contributions of £1,500 and employer contributions £900, totalling £2,400. Under a salary sacrifice pension, all contributions are officially made by the employer.

** Official salary minus personal allowance of £12,570 and employee pension contributions.

Do all employers offer salary sacrifice pensions?

No. Employers can choose whether or not to offer a salary sacrifice pension. If they do, you can usually choose whether or not to salary sacrifice. While the National Insurance benefits may make it seem a no-brainer, there are some possible disadvantages to bear in mind, as we outline below.

Can I choose how much to sacrifice?

There are no restrictions on how much you can pay into a pension. So, subject to the rules of the scheme, you should be able to pay more in than the standard 5% of your original salary that’s required under auto enrolment. You won’t be able to “sacrifice” less than 5% though, unless your employer pays in more than they’re legally required to. That’s because, under auto enrolment rules, the combined pension contributions of you and your employer must add up to 8%. Your employer is responsible for at least 3% of this. It’s up to the organisation if it wants to pay in more.

There are a couple of caveats to this though:

1. Salary sacrifice must not cause your gross pay to fall below the national minimum wage or national living wage rates.
2. There’s a limit to how much you can pay into a pension each year before you have to pay tax on the contributions. As of the 2024/2025 tax year, the maximum annual limit is £60,000.

What are the advantages of a salary sacrifice pension?

The main advantage of a salary sacrifice pension is the potential for higher take-home pay, because you’ll be paying lower National Insurance contributions. Or, alternatively, you can boost your pension by paying these savings into your pension pot.

A potential added bonus might be extra contributions from your employer, too. Because your official salary is lower, your employer will also be liable for lower National Insurance contributions. With some salary sacrifice schemes, your employer might pay part or all of its National Insurance savings into your pension. It doesn’t have to do this, though.

If, in the scenario we’ve used above, your employer contributed 100% of its National Insurance savings into your simple salary sacrifice pension, your take home pay would be the same (£24,039.60), but your pension contributions would get an additional boost – to a total of £2,607 rather than £2,400.

Are there any disadvantages to pension salary sacrifice?

The National Insurance savings that can be made through a salary sacrifice pension can make it a good option for many. But there are some potential downsides that you should weigh up. These include:

• Your official salary will be lower because of the amount you’ve sacrificed. This might matter if, for example, you want to take out a mortgage that’s based on a multiple of your official income.
• If your employer also offers life insurance as a workplace benefit, this amount of cover you get is often based on a multiple of your salary. This could mean that sacrificing some of your salary also reduces your level of life insurance cover. Check with your employer if it calculates your life insurance cover before or after any salary sacrifice.
• If you make pension contributions from your salary under regular pension arrangements then, if you need to, you can usually get a refund of these contributions within a certain timeframe. You’ll need to check with your employer if there are any restrictions and what this means for your tax. With a salary sacrifice scheme, because it’s technically your employer that’s made the contributions, you’re unlikely to be able to get a refund. You’ll need to wait until the official age to access a workplace pension before you can withdraw the money. This is usually 55 as of 2024, rising to 57 from 2028.
• Because you’ll be paying lower National Insurance contributions, salary sacrifice may affect any state benefits that are linked to this. For example, statutory maternity pay or the state pension.

What do I have to do to get a salary sacrifice pension?

Your employer should let you know whether it offers salary sacrifice as a pension option. This could be when you start a new job or if your employer decides to introduce salary sacrifice pensions during your employment.

To opt in, you’ll need to use your employer’s official process for doing so. Because enrolling in a salary sacrifice pension scheme will affect your official salary, it will probably mean agreeing to a change in your contract.

Bottom line

Provided that your salary is high enough that salary sacrifice wouldn’t take it below the minimum wage, opting into a salary sacrifice pension scheme could be a good way to boost either your take-home pay or your pension pot thanks to the savings in National Insurance. But not every employer offers one and there may be some circumstances in which you’d be better off sticking with a regular workplace pension. Make sure you’ve weighed up all the pros and cons before jumping in feet-first.

Frequently asked questions

• Does salary sacrifice affect my state pension?

  Your state pension entitlement is based on your National Insurance contributions. So, because you pay less National Insurance with a salary sacrifice scheme, there is small a chance it could affect your state pension. However, this would only apply if the salary sacrifice took your official salary below the minimum threshold for National Insurance Contributions. In practice, only a minority of part-time workers are likely to be affected by this.

• Can I have a salary sacrifice pension if I'm self-employed?

  We’re afraid not. Salary sacrifice pensions are workplace pensions that are only available through an employer. So they’re not available to self-employed people.

• Can I have a salary sacrifice pension if I earn a low salary?

  It depends on how low your salary is. You can only pay into a salary sacrifice pension if it does not take your earnings below the national minimum wage.

• What is the maximum pension salary sacrifice?

  There’s no official cap on how much you can contribute to your pension through salary sacrifice. However, your total pension contributions won’t benefit from tax relief if they are higher than £60,000 per year – or the level of your official salary, if this is lower. And the salary sacrifice must not take your official salary below the national minimum wage or national living wage rates.

• Do I have to use a salary sacrifice scheme if my employer offers one?

  No. Just as it’s up to your employer whether or not it offers a salary sacrifice pension, it’s also up to you whether you opt in or not. If you decide the disadvantages outweigh the advantages for you, you can stick with the regular way of paying into a pension.

Who is most likely to be researching pensions and salary sacrifice?

Finder data suggests that men aged 45-54 are most likely to be researching this topic.

Written by

Ceri Stanaway

Writer

Ceri Stanaway is a researcher, writer and editor with more than 15 years’ experience, including a long stint at independent publisher Which?. She’s helped people find the best products and services, and avoid the pitfalls, across topics ranging from broadband to insurance. Outside of work, you can often find her sampling the fares in local cafes. See full bio