Compare making personal pension contributions versus salary sacrifice. Salary sacrifice saves both income tax AND National Insurance — making it significantly more efficient for most employees.
For guidance only. TheBizHQ.com is a private, independent website — not affiliated with HMRC, Companies House or any UK government body. All figures are estimates based on the information you enter and should not be relied upon for financial, tax or legal decisions. Tax rates are reviewed periodically but may not always reflect the latest HMRC changes. Full disclaimer →
Both methods get money into your pension, but salary sacrifice is almost always more efficient for employees because it saves National Insurance as well as income tax.
You earn your full salary, pay income tax and NI on it, and then make a pension contribution from your post-tax pay. The pension provider claims 20% basic rate tax relief automatically. Higher rate taxpayers can claim additional relief through Self Assessment.
You agree with your employer to reduce your gross salary by the contribution amount. Because your gross salary is lower, you pay less income tax AND less employee National Insurance (currently 8% on earnings between £12,570 and £50,270). Your employer pays the pension contribution directly, so no NI is charged on it at all.
This is where salary sacrifice wins. A personal contribution still has NI deducted before it reaches the pension. With salary sacrifice, the contribution comes off before NI is calculated — saving you 8% NI (or 2% above the upper threshold) on the contribution amount.
Your employer also saves 13.8% employer NI on the sacrificed amount. Some employers pass this saving on to employees — either adding it to the pension contribution or as additional salary. It is worth asking your employer about this.
Salary sacrifice is only available to employees — if you are self-employed you cannot use it. Use our Pension Contribution Calculator to see what tax relief is available on personal contributions.