Salary sacrifice
Salary sacrifice is a tax-efficient way for you to make pension contributions. It allows you to give up some of your gross salary in exchange for a non-cash benefit, such as an employer pension contribution. Any National Insurance and income tax savings can be used to help increase the pension contributions being paid, or for your take-home pay to be increased.
Salary sacrifice may not be suitable, or may only have a minimal benefit, for employees with low earnings. HM Revenue & Customs (HMRC) guidance also states that a salary sacrifice arrangement must not reduce an employee's cash earnings below National Minimum Wage rates.
What benefits could salary sacrifice have?
You won’t pay tax and National Insurance on the amount you sacrifice, so you can either:
- Increase the level of contribution to your pension fund with no impact on your take-home pay.
- Or keep the same level of pension contribution while increasing your take-home pay.
Let’s look at an employee subject to UK tax with a gross salary of £24,000 in the 2024/25 tax year.
Before salary sacrifice
Making a personal contribution of £960 (net), a year into their plan.
Which after tax relief from the government, of 20%, is added, is a gross employer contribution of £1,200.
And their take-home pay is £19,839.60.
£24,000
Gross salary
£3,200.40
Income Tax and NI*
£960
Personal contributions (net)
£19,839.60
Take-home pay
£1,200
Pension contribution
Saving with salary sacrifice
They choose to give up £1,333.33 of their gross salary and, in exchange, their employer pays the increased amount of £1,333.33 into their plan, as an employer contribution.
Their take-home pay is not affected and stays at £19,839.60.
£22,666.67
Gross salary
£2,827.07
Income Tax and NI*
Nil
Personal contributions (net)
£19,839.60
Take-home pay
£1,333.33
Pension contribution
Boost take-home pay
In this example, the employee chooses to keep their pension contribution of £1,200 the same (as it was without salary sacrifice).
And use salary sacrifice to boost their take-home pay to £19,625.36.
£22,945.52
Gross salary
£2,905.15
Income Tax and NI*
Nil
Personal contributions (net)
£20,040.37
Take-home pay
£1,200
Pension contribution
These amounts shown are examples only and aren’t guaranteed.
So, by saving with salary sacrifice, they’ve increased:
- Their pension contribution to £1,333.33 (increase of £133.33) while maintaining their take-home pay of £19,382.40 or
- Their take-home pay to £20,040.37 (increase of £200.77) while maintaining a pension contribution of £1,200.
Your employer will also save on their National Insurance payments through salary sacrifice, and they might share these savings with you to increase your contributions further.
It’s easy for you, as your employer will make all the arrangements if they offer salary sacrifice.
Can the the amount of salary sacrificed be changed?
Salary sacrifice is a formal, agreed change to your contractual terms and conditions. You can normally change the amount you sacrifice – increase or decrease the amount. However, your employer may have rules around when you can do this, for example, if you have a relevant ‘lifestyle event’, such as getting married. You can also opt out of salary sacrifice at any time.
Things to consider
Salary sacrifice isn’t always suitable for everyone. You should think about:
- The impact on any other benefits that are linked to salary. For example, sick pay, working tax credit or child tax credit, the State Pension, death benefits or overtime. However, it's still possible for an employer to use a 'notional' or pre-sacrifice salary for these benefits.
- Mortgage lending that may be linked to your actual salary received.
- Statutory benefits that may be affected by a reduction in salary, for example statutory maternity and paternity pay.
The value of the reduction in tax and National Insurance will depend on your individual circumstances and could change.
The value of investments can fall as well as rise and isn't guaranteed. The final value of your pension pot when you come to take benefits may be less than has been paid in.
If you want more information on the suitability of salary sacrifice, you should get financial advice. There may be a charge for this.
If you don't wish to contribute to your workplace pension by salary sacrifice, you can usually opt to pay by what is called a net pay arrangement, or by the relief at source method, depending on the type of workplace pension scheme your employer runs. If you're not sure what type of workplace scheme you are in, please speak to your employer. Further details of these methods can be found in ‘Putting money into your pension’.