How it works
You agree a new, lower salary with your employer. The amount you give up is paid straight into your pension as an employer contribution. Income Tax, National Insurance and student loan repayments are then worked out on the lower salary, so your take-home pay falls by less than the amount saved.
Example: £50,000 salary, 5% into a pension
England, 2026/27, no student loan. Pension contribution £2,500 a year in both cases.
| No pension | Relief at source | Salary sacrifice | |
|---|---|---|---|
| Income Tax | £7,486 | £7,486 | £6,986 |
| National Insurance | £2,994 | £2,994 | £2,794 |
| Cost to you of the pension | £0 | £2,000 | £2,500 |
| Take-home pay | £39,520 | £37,520 | £37,720 |
Both methods put £2,500 into the pension. Salary sacrifice leaves you £200 a year better off in this example, because you also save 8% National Insurance on the sacrificed amount. Many employers add part of their own NI saving (15%) to your pension too.
When it helps most
- Near £100,000: sacrificing income above £100,000 restores your Personal Allowance and avoids the 60% tax trap.
- Bonus sacrifice: putting a bonus into your pension saves Income Tax and NI on all of it.
- Student loan holders: repayments are based on your lower salary, so you repay less each month.
Things to check first
- Your salary can't be cut below the National Minimum Wage (£12.71 an hour from April 2026).
- A lower salary can reduce statutory maternity pay, some benefits and mortgage borrowing based on salary.
- Changes are usually only allowed once a year or after a life event.
Try your own numbers in the UK take-home pay calculator: open “Savings and other deductions” and choose “Salary sacrifice”.
Frequently asked questions
Is salary sacrifice worth it?
Usually, yes, if you're saving into a pension anyway. On a £50,000 salary, sacrificing 5% leaves you about £200 a year better off than relief at source, because you also save National Insurance.
Does salary sacrifice reduce National Insurance?
Yes. Both you and your employer pay National Insurance on the lower salary. You save 8% (or 2% above £50,270) on the sacrificed amount.
Does salary sacrifice affect my student loan?
Yes. Student loan repayments are calculated on the lower salary, so they go down.
Written by Muhammad Raza. Last updated October 23, 2026.