Salary sacrifice, explained (2026/27)

Salary sacrifice is one of the most tax-efficient ways UK employees can save into a pension, yet many schemes still run the less efficient alternative by default. Here is the difference in pounds.

How it works

You agree to a lower contractual salary; your employer pays the difference straight into your pension. Because your salary is lower, you pay less Income Tax and less National Insurance, and your employer saves 15% employer NI, which good employers partly pass on.

The numbers

A basic-rate taxpayer sacrificing £2,000: costs £1,440 of take-home (saving 20% tax + 8% NI). The same £2,000 via relief at source costs £1,600 net. That is £160 a year of pure NI saving at basic rate, and higher-rate taxpayers get their full relief instantly instead of claiming the extra 20% through self-assessment, which some never do.

Where it shines brightest

Between £100,000 and £125,140 the marginal rate is 62%: sacrificing £1,000 there costs just £380 of take-home. Sacrifice is the standard route out of the 60% trap and, for parents, back under £100,000: above that, Tax-Free Childcare and the working-parent free hours stop, and the test applies to each parent's own income. Try it in the salary calculator, set your pension percentage and watch the marginal rate.

The traps

  • From 6 April 2029: only the first £2,000 a year sacrificed into a pension stays free of National Insurance; anything above is charged like normal pay. This is law under the National Insurance Contributions (Employer Pensions Contributions) Act 2026. Income tax relief is unchanged.
  • Minimum wage floor: your post-sacrifice salary may not fall below the National Living Wage, payroll must refuse the sacrifice if it would.
  • Statutory pay: maternity, paternity and sick pay are based on the reduced salary; sacrificing heavily before parental leave can cost real money.
  • Borrowing: lenders see the lower salary; mention the sacrifice when applying for a mortgage.
  • Salary-linked benefits: life cover and redundancy pay may shrink unless the employer uses a "reference salary".

Frequently asked questions

How does salary sacrifice save National Insurance as well as income tax?

Your contractual salary is reduced before tax calculations, so both income tax and employee National Insurance are charged on a lower figure. At basic rate this saves an additional 8% NI on top of the 20% income tax relief.

Can salary sacrifice reduce my pay below the National Living Wage?

No. Your post-sacrifice salary cannot fall below the National Living Wage and payroll is required to refuse the arrangement if it would breach that floor.

Will the employer NI relief on pension salary sacrifice change after 2029?

Yes. From 6 April 2029 only the first £2,000 a year sacrificed into a pension remains free of employer National Insurance; amounts above that will be charged NI as if they were normal pay. Income tax relief is unchanged.

Last updated 2026-11-04. General information, not financial advice.