Salary sacrifice, explained

Salary sacrifice is an arrangement where you agree to give up part of your gross salary, and your employer pays that amount straight into your pension instead. Your contractual pay goes down, and the money lands in your pension without ever being treated as pay. This lesson explains the mechanics and the trade-offs — it's general information, not scheme advice.

Why it can cost you less

The money you sacrifice never counts as pay, so it isn't subject to income tax or National Insurance. On earnings between the National Insurance thresholds, employees pay 8% National Insurance (and 2% above the Upper Earnings Limit of £50,270), so sacrificing salary removes that National Insurance as well as the income tax. Paying the same amount from your take-home pay would only save the income tax — the National Insurance saving is what makes sacrifice different.

The employer's side

Employers pay National Insurance on your salary too, so sacrifice saves them money as well. Some employers pass part or all of that saving into your pension on top — but they don't have to, so it's worth checking what your scheme does rather than assuming.

Who tends to benefit

Because the saving comes from National Insurance and income tax you'd otherwise pay, the arrangement suits people who are earning enough to pay both and who are comfortable locking the money away in a pension until retirement age. The higher your tax band, the larger the income-tax part of the saving.

The trade-offs to know

A lower gross salary is the flip side. It can reduce mortgage borrowing (lenders assess your reduced salary), and things linked to gross pay — statutory maternity, paternity and sick pay, and some state benefits — can be affected. You also can't sacrifice below the National Minimum Wage. None of these makes sacrifice wrong; they're simply the things to weigh for your own situation.

This explains how salary sacrifice works and what to consider, not whether it's right for you — that depends on your earnings, goals and circumstances. It's general information, not advice. The salary-sacrifice calculator lets you see the illustrative income-tax and National-Insurance saving on your own figures.