Your payslip says “pension” and takes 5% of your pay. What it does not say is which of two arrangements your employer uses, and the two are taxed differently.
One of them leaves you with more money. Not a lot more, and the gap behaves in a way most people would not guess, but it is real and it is worth knowing which one you are on.
What is salary sacrifice?
Under a net pay arrangement, the ordinary auto-enrolment setup, your contribution comes out of your gross pay before income tax is worked out. You get tax relief immediately. National Insurance is still charged on your full salary.
Under salary sacrifice, you agree to a lower contractual salary and your employer pays the difference into your pension as an employer contribution. Your salary is genuinely lower. Income tax and National Insurance are both worked out on the smaller figure.
That single difference, National Insurance charged on £42,750 instead of £45,000, is the whole story.
The pension pot is the same size either way. £2,250 goes in under both arrangements. Salary sacrifice does not build a bigger pension. It costs you less to build the same one.
How much more do you take home?
We ran three salaries through the take-home pay calculator at a 5% contribution, once as a net pay arrangement and once as salary sacrifice.
Salary sacrifice beats a net pay arrangement by the National Insurance on the contribution. Above the upper earnings limit that rate drops from 8% to 2%, which is why the £60,000 earner gains least. Figures from our own calculator, 2026/27 rates.
On £45,000 the gain is £180 a year, or £15 a month. Enough to notice on a standing order, not enough to change your life.
Why does the saving shrink as you earn more?
Look at the £60,000 bar. It is the smallest, and that is not a mistake.
National Insurance is charged at 8% on earnings between the primary threshold and the upper earnings limit, then at 2% above it. A £60,000 earner is already past the upper limit, so the salary they sacrifice was only attracting 2% National Insurance in the first place. Two per cent of £3,000 is £60.
The £45,000 earner sacrifices salary that was being charged at 8%, and saves four times as much on a smaller contribution. The current thresholds are listed on our rates and thresholds page.
Salary sacrifice is worth most to people earning between the National Insurance primary threshold and the upper earnings limit. That covers the large majority of employees.
Does salary sacrifice cut your income tax as well?
No, and this is where a good deal of online advice goes wrong.
- Stays yours
- Tax and National Insurance
The income tax is identical at £6,036. Only the National Insurance segment moves, by £180. Segments are drawn to scale and labelled individually.
Both arrangements give the contribution full income tax relief, just by different routes. A net pay arrangement takes the contribution off your taxable pay. Salary sacrifice lowers the pay in the first place. Either way you are taxed on £42,750, and either way the bill is £6,036. The way each deduction is worked out is set out in full on our methodology page.
What does salary sacrifice cost you?
A lower contractual salary is a lower salary for every other purpose, and several of those purposes matter.
- Statutory redundancy pay is based on a week’s pay, which is your reduced salary. Our redundancy pay calculator shows how much a week is worth in a statutory payment.
- Statutory Sick Pay and other statutory payments are based on normal weekly earnings. For a low earner, sacrificing salary can reduce what the sick pay calculator returns.
- Mortgage applications. Lenders assess the salary on your payslip. Some will add back a sacrificed pension contribution, many will not.
- Life cover and income protection are often set as a multiple of salary, and the multiple is applied to the lower figure unless the scheme says otherwise.
Your employer cannot sacrifice your salary below the National Minimum Wage, which is why schemes usually exclude the lowest-paid staff.
What if you earn just over £100,000?
Then salary sacrifice stops being worth £180 and starts being worth thousands.
The Personal Allowance is withdrawn at £1 for every £2 of income above £100,000, and disappears completely at £125,140. Inside that band each extra pound is taxed at 40%, and it also destroys 50p of allowance which was itself being taxed at 40%. The effective rate on that slice of income is around 60%.
Sacrificing salary reduces the income the taper is measured against. Someone on £110,000 who sacrifices £10,000 restores the whole of their Personal Allowance, and the £10,000 in their pension costs them roughly £4,000 of take-home pay. A net pay arrangement achieves most of the same thing through tax relief, which is why the two arrangements matter less to each other here than the act of contributing at all.
This is also the group the 2029 change below is aimed at.
Is the National Insurance saving about to end?
Partly. From 6 April 2029, employer and employee National Insurance will be due on salary-sacrificed pension contributions above £2,000 a year. Contributions up to £2,000 keep the existing treatment.
On a £45,000 salary at 5%, a £2,250 contribution is £250 over the cap, so the change costs 8% of £250. Twenty pounds a year. Anyone sacrificing large sums, and higher earners deliberately sacrificing down past £100,000, will feel it far more.
That is three tax years away and legislation moves. We will note it on our corrections page when the rules actually change.
How do you find out which one you are on?
Compare your payslip with your contract. Under salary sacrifice the gross pay on the payslip is lower than the salary in your contract, and the pension line is often shown as an employer contribution or not itemised as a deduction at all. Under a net pay arrangement the gross matches your contract and the pension appears as your own deduction.
If the two disagree for some other reason, check the tax code as well. A wrong code moves far more money than this does, and we cover how to spot one in our guide to emergency tax codes on a first payslip.
Should you ask your employer to switch?
It is a reasonable thing to ask, and the employer saves National Insurance too, so the request is not one-sided. Some employers pass their saving into your pension as well, which is worth considerably more than the £180.
Two situations where you should think harder. If you are near the minimum wage, or you expect to claim a statutory payment soon, the lower salary can cost you more than the National Insurance saves. And if a mortgage application is coming up, ask the lender how they treat sacrificed contributions before you change anything.
Everything above assumes a standard tax code, one job and no other income. Run your own numbers before you act on any of it.