Salary sacrifice for pensions, explained

What salary sacrifice means

With pension salary sacrifice, you agree to give up part of future cash salary. Your employer then pays that amount into your pension as an employer contribution. It is a contractual change, not simply a deduction taken from your net pay.

Because the cash salary is reduced before payroll works out tax and National Insurance, the amount that reaches your bank account can fall by less than the amount sent to the pension. The exact figures depend on your pay, tax region, National Insurance category and the scheme.

HMRC describes salary sacrifice as an agreement to reduce cash pay in return for a non-cash benefit. A formal change to the employment terms matters. Read HMRC's salary sacrifice guidance.

A simple example

Suppose you agree to sacrifice GBP200 from monthly pay for a pension. The pension receives GBP200 from the employer. Your cash pay is GBP200 lower before payroll estimates Income Tax and employee National Insurance, so your take-home pay usually drops by less than GBP200.

This does not mean the difference is free money. It is the tax and National Insurance treatment of lower cash pay. Some employers also choose to add some or all of their employer National Insurance saving to the pension, but that is an employer policy choice, not an automatic rule.

Use the salary sacrifice calculator to compare a before-and-after estimate using your own pay period.

What may change besides take-home pay

• Your contract may describe a lower cash salary while the arrangement is active.
• Mortgage applications, life cover, overtime, bonuses, statutory payments and salary-linked benefits can use different definitions of pay.
• Student loan deductions can depend on payroll treatment and the pay used by the employer.
• Cash earnings must not be reduced below National Minimum Wage requirements.

Ask your employer which salary figure is used for these items. Do not assume that every benefit keeps using your pre-sacrifice salary.

Salary sacrifice is not the same as every pension deduction

Workplace pensions can also use net pay or relief at source. With net pay, a contribution is taken before Income Tax. With relief at source, it is taken after tax and the provider normally adds basic-rate tax relief. National Insurance treatment can differ, so the payslip and take-home effect are not necessarily the same as salary sacrifice.

GOV.UK explains the differences between net pay and relief at source. Check the workplace pension guidance, then ask the scheme or payroll team which method you have.

Questions worth asking payroll or HR

• Is this a formal salary sacrifice arrangement?
• Will the employer add any NI saving to my pension?
• Can I change or pause the arrangement, and when?
• Which salary figure is used for bonuses, overtime, statutory pay, life cover and mortgage letters?
• Will it change how student loan repayments are calculated in this payroll?

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