Updated on 6 April 2026

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, and why it might or might not benefit you.

a sheet of white paper with the words 'SALARY SACRIFICE' typed on them in red ink. next to this is a pair of glasses, a calculator an a jar of money tipped on its side, some of the money has made it's way onto the paper.
Aaban / Shutterstock.com

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Overview

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

An employee’s pension contributions usually attract tax relief, but they do not normally  attract National Insurance relief. This means that an individual pays: 

  • income tax on their income after pension contributions have been deducted (unless the contributions are made through a relief at source arrangement), but 
  • National Insurance contributions on their pay before the pension contributions have been deducted. 

In other words, the employee pays National Insurance contributions on their earnings that are contributed to their pension. 

However, if an employer makes a contribution to an employee’s pension scheme, there is no tax or National Insurance to pay by the employer or employee on the value of the contribution.

Under a pension 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 National Insurance contributions you would be due to pay are calculated on the smaller salary. In other words, you don’t pay National Insurance contributions on the amount of salary you choose to give up. Your employer pays any employer’s National Insurance contributions 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 National Insurance contributions.

  See below for details of changes that are planned to restrict the amount of National Insurance relief that can be obtained through a salary sacrifice arrangement. 

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. 

Make sure you are clear on these employment law aspects before deciding to enter into a salary sacrifice arrangement so that you understand how they may affect you. 

National minimum wage

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 you should also check your own pay.

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 of salary sacrifice for someone on a low income can be found in our Minimum Wage guidance. 

Low earners

Even if national minimum wage is not a concern, if you are a part-time worker and your earnings are less than the tax free personal allowance, salary sacrifice might not be a suitable option.

As explained in our page How tax relief is given on pension contributions, you still get 20% tax relief if you are in a relief at source scheme and, from 2024/25 onwards, should be entitled to an equivalent top-up payment if you are in a net pay scheme. However, in both cases, if your employer offers you a salary sacrifice arrangement, you will lose the 20% tax relief, so could find yourself worse off.

Example – low earner worse off as a result of pension salary sacrifice

Dave works part-time and earns £11,700 per year (£975 per month). He is paid above the minimum wage. The personal allowance of £12,570 (for 2026/27) means he pays no tax. Employee National Insurance contributions are only due on earnings over £1,048 per month so he will not pay employee National Insurance contributions either. He is in a relief at source pension scheme. His contribution amount is £100 per month (which, under a relief at source scheme, works out as a net contribution of £80 – that is, 80% of £100).

With no salary sacrifice arrangement, his monthly payslip in 2026/27 will look something like this:

Gross Pay   Deductions  
Employment £975.00 Tax £0.00
    Employee National Insurance contributions £0.00
    Pension £80.00
Net Pay £895.00    

Although Dave has only had £80 deducted from his salary, £100 will end up in his pension, as £20 extra (which is 20% of the total contribution of £100) will be sent to the pension scheme by HMRC.  It has only cost him £80 to receive a total pension contribution of £100. 

However, if Dave were to opt-in to a salary sacrifice arrangement, his weekly payslip will look something like this:

Gross Pay   Deductions  

Employment

(£975 minus £100)

 £875.00 Tax £0.00
    Employee National Insurance contributions £0.00
Net Pay £875.00    

Dave has reduced his salary by the full amount of the contribution so that his employer can make it on his behalf. The £100 contribution is therefore costing him the full £100, and not £80 as was the case under the relief at source arrangement, as shown above. In this scenario, since Dave does not pay any employee’s National Insurance contributions, he also 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 £20 more than if the contribution was made via relief at source.

Autumn Budget 2025 announcement – what is changing

There is currently no limit to the amount of relief from National Insurance contributions that employees and employers can receive on pension contributions made through a salary sacrifice arrangement (apart from the national minimum wage cap mentioned above). 

In the 2025 Autumn Budget it was announced that a cap of £2,000 would be introduced on the amount of pension contributions made through salary sacrifice that will be exempt from National Insurance. It is proposed that, from April 2029, if an employee makes pension contributions through a salary sacrifice arrangement of more than £2,000, they and their employer will have to pay full National Insurance contributions on the excess amount. We will update this page with more information when it is made available. 

Further information

Guidance on salary sacrifice arrangements can be found on GOV.UK. Although this is aimed at employers, employees may find it useful too. 

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

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