What Is Salary Sacrifice for Pensions? Benefits & How It Works

Salary sacrifice for pensions lets you save tax and boost your pension contributions. Learn how it works, its benefits, and whether it’s right for you.

Salary sacrifice for pensions is an arrangement where you agree to give up part of your salary in exchange for your employer making additional pension contributions on your behalf. This method reduces your income tax and National Insurance contributions (NICs) while boosting your pension savings.

It is a tax-efficient way to save for retirement and is commonly offered by employers as part of their workplace pension scheme.

How Does Salary Sacrifice for Pensions Work?

With salary sacrifice:

  1. You agree with your employer to reduce your salary by a set amount.

  2. Instead of paying this amount to you as wages, your employer pays it directly into your pension.

  3. Because your salary is lower, you pay less income tax and National Insurance.

  4. Your employer may also contribute extra to your pension from their NIC savings.

Example of Salary Sacrifice for Pensions

Without Salary Sacrifice

  • Salary: £30,000

  • Pension Contribution: £200 (employee), £100 (employer)

  • Take-home pay: £1,978 per month

With Salary Sacrifice

  • Salary: £29,800 (£200 given up for pension)

  • Pension Contribution: £200 + tax savings

  • Take-home pay: £1,989 per month (higher because of tax & NIC savings)

By using salary sacrifice, you increase your pension contributions while keeping more of your take-home pay.

Benefits of Salary Sacrifice for Pensions

  • Higher Pension Contributions – Your pension grows faster with extra employer contributions and tax savings.
    Lower Income Tax and NICs – Reducing your salary means you pay less tax and NICs, increasing take-home pay.
    Employer Savings – Employers save on NICs too, and some pass these savings on as extra pension contributions.

Are There Any Downsides?

Lower Salary May Affect Benefits – A lower salary may reduce future mortgage applications or statutory benefits (e.g., maternity pay).
Not Always Suitable for Low Earners – If salary sacrifice reduces your pay below the National Minimum Wage, it cannot be used.
Less Take-Home Pay If Not Managed Well – Though you save on tax, your gross salary is lower, so you should ensure affordability.

Who Benefits the Most from Salary Sacrifice?

  • Higher earners who want to maximise tax relief.

  • Employees with generous employer pension contributions.

  • People looking to boost retirement savings without reducing take-home pay too much.

How to Set Up Salary Sacrifice for Pensions

  1. Check if your employer offers it – Some schemes are automatic, while others require opting in.

  2. Decide how much salary to give up – Usually, this is a percentage of earnings.

  3. Review the impact on benefits – Ensure it won’t affect loans, mortgages, or statutory benefits.

  4. Sign a salary sacrifice agreement – Your employer will confirm the new arrangement.

Final Thoughts

Salary sacrifice for pensions is a tax-efficient way to increase retirement savings while reducing tax and NICs. However, it’s important to check whether it suits your financial situation, benefits, and future plans before committing.

If unsure, speaking to a financial adviser or HR department can help determine if it’s the right option for you.