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From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages is reduced from 12% to 10%. From 6 April 2024, the main rate of self-employed class 4 NIC will reduce from 9% to 8% and class 2 NIC will no longer be due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. Our guidance will be updated in full in spring 2024.

Updated on 6 April 2023

Pension tax relief: salary sacrifice

Employees sometimes might have the opportunity to contribute to a pension under a salary sacrifice arrangement. Here we look at what this means, why it might (or might not!) benefit you.

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Many employers offer to run their employees’ pension schemes in conjunction with a salary sacrifice arrangement. They do this because it saves both you and your employer National Insurance contributions (NIC).

To explain: an employee’s pension contributions usually attract tax relief (provided they are a taxpayer or are in relief at source scheme), but they do not ordinarily attract NIC relief. This means that an individual pays income tax on the amount after pension contributions have been deducted, but pays NIC on the amount before the pension contributions have been deducted. However, if an employer makes a contribution to an employee’s pension scheme, then there is no tax or NIC to pay on the value of the contribution.

Under a pensions salary sacrifice arrangement, you agree to give up part of your salary in return for your employer making a larger contribution to your pension pot. This can save you money because the NIC you would be due to pay are calculated on the smaller salary. Your employer would pay any employer’s NIC on the smaller salary too. You may also benefit from more pension contributions from your employer, if they are willing to contribute some of the money they are saving on employer’s NIC.

Things to consider

A salary sacrifice arrangement involves altering your employment contract to give up a portion of your earnings. This may affect future calculations of pensions, redundancy pay, statutory maternity pay, paternity pay, shared parental pay, etc. You should make sure you are clear on these employment law aspects before deciding to enter into a salary sacrifice arrangement so you fully understand how they may affect you in the future. Guidance on salary sacrifice arrangements can be found on GOV.UK. Although this aimed at employers, employees may find it useful too. 

National minimum wage

You should also be aware that a salary sacrifice arrangement is not allowed to reduce your cash pay below the relevant national minimum wage or national living wage rates. This rule is in place because of fears that people on lower incomes may sacrifice their salary to an amount below the Lower Earnings Limit, that is, the limit at which you start to accrue entitlements under the social security system. Your employer should be keeping an eye on this, but there is no harm you doing so too.

If you are paid slightly more than the minimum wage, it is important to watch out for any changes to the minimum wage rates. This is because a rise in the minimum wage rate could affect your ability to enter into, or remain in, a salary sacrifice scheme. An example can be found in our Minimum Wage guidance - Neena.

Low earners

People who do not earn enough to pay employers NIC will not benefit from a pensions salary sacrifice arrangement.

In addition, as explained in our page How tax relief is given on pension contributions, even if you are a low earner and do not pay tax, you still get 20% tax relief if you are in a relief at source scheme. However, if your employer offers you a salary sacrifice arrangement, you will lose the 20% tax relief, so could find yourself worse off.


Dave earns £11,500 per year (£221.15 per week). He is paid above the minimum wage. The personal allowance of £12,570 (for 2023/24) means he pays no tax. Employee NIC is only due on earnings over £242 a week so he will not pay employee NIC either. He is in a relief at source pension scheme. His contribution amount is £5.15 per week (which works out as a net contribution of £4.12 – that is, 80% of £5.15).

With no salary sacrifice arrangement, his weekly payslip in 2023/24 will look something like this:

Gross Pay   Deductions  
Employment £221.15 Tax £0.00
    Employee NIC £0.00
    Pension £4.12
Net Pay £217.03    

Although Dave has only had £4.12 deducted from his salary, £5.15 will end up in his pension as 20% extra (£1.03) will be sent to the pension scheme by HMRC.

However, with a salary sacrifice arrangement, his weekly payslip will look something like this:

Gross Pay   Deductions  


(£221.15 less £5.15)

£216.00 Tax £0.00
    Employee NIC £0.00
Net Pay £216.00    

Dave has reduced his salary by the full amount of the contribution so that his employer can make it on his behalf. The £5.15 contribution is therefore costing him £5.15 not £4.12. In this scenario, since Dave does not pay any employees NIC, he does not get the benefit of the National Insurance saving that typically goes with a salary sacrifice scheme.

This means that the salary sacrifice arrangement has cost him £1.03 more than if the contribution was made via relief at source.

Further information

You can read more about salary sacrifice and your pension on the Moneyhelper website.

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