What is a salary sacrifice pension and how does it work?

Salary sacrifice is an arrangement between you and your employer, where you give up or ‘sacrifice’ a portion of your salary in exchange for other, non-cash benefits.

These can be things such as childcare vouchers or a company car. However, it can also be a tax-effective way for employees to save for retirement.

Here we explain how salary sacrifice for pensions works and the pros and cons of contributing in this way.

What is a salary sacrifice pension?

If you’re part of a workplace pension, you and your employer will contribute every month.

The minimum total contribution is 8% of your qualifying earnings - your employer must pay 3%, while you need to contribute 5% (unless your employer pays in more).

However, it may be possible to save for retirement more tax-effectively by using a salary sacrifice arrangement. This involves giving up a portion of your salary for a bigger pension contribution from your employer.

Although reducing your salary might not sound terribly appealing, it can actually be a particularly tax-savvy move. This is because by reducing your gross (pre-tax) salary, you’ll pay less income tax and national insurance (NI) on your earnings. 

Depending on the arrangement, you can either take the tax saving as higher take-home pay or keep your pay the same and use it to boost your pension.

Your employer saves on NI too - and if you’re lucky, they might pass that saving onto you, boosting your pension contribution even further.

How does a salary sacrifice pension work?

How exactly does salary sacrifice boost your pension pot?

Here's an example of what happens during the process:

How much salary should I sacrifice for my pension?

How much of your salary you can sacrifice depends on your current contractual arrangement with your employer.

However, the amount cannot mean your salary falls below the minimum wage.

You should take great care when considering the amount, as it affects your future finances in several ways.

Consider both your retirement goals and your pre-retirement goals, such as buying property – for example, a lower salary can reduce your mortgage options.

It may affect some of your other earnings-related benefits as well, e.g. if your employer offers life cover or income protection insurance.

A lower salary could also reduce the statutory maternity/paternity pay you’re entitled to, since it’s calculated on your earnings.

It’s important to understand all the areas your decision will affect – and to what extent – so that you can see if the advantages outweigh the drawbacks.

What are the pros and cons of salary sacrifice pension?

Now we’ll explore some of the pros and cons of salary sacrifice to consider.

What are the advantages of a salary sacrifice pension?

• It grows your pension pot faster: Sacrificing a portion of your salary is one way to grow your pension pot faster.

• Saves on income tax and NI contributions: The tax and NI you pay are based on what you earn, so lowering your salary lowers your tax and NI contributions too.

What are the disadvantages of a salary sacrifice pension?

• It impacts how much you can borrow: Credit providers typically calculate how much you can borrow based on your salary. A lower figure might influence what size mortgage you can get, for instance.

• It impacts other earnings-related benefits: As mentioned earlier, lower earnings can influence your other benefits, including life cover or statutory maternity pay.

Is there a limit to a salary sacrifice pension?

There isn’t a specific limit to how much you can sacrifice.

However, your reduced salary has to remain above the national minimum wage.

You also need to remember you can only contribute a total of £60,000 to all pension savings annually. This includes employer contributions, so ensure the higher contributions from your salary sacrifice doesn’t push you over this.

It’s also helpful to check the minimum and maximum contributions allowed by your chosen pension provider.

How do I work out the effect on tax and National Insurance contributions?

The calculations on tax and NICs can be quite convoluted, but there are various calculators available online to help you work it out.

What’s the difference between auto-enrolment and a salary sacrifice pension?

It is the law that every employer auto-enrols their employees into a workplace pension scheme, provided that those employees are between the ages of 22 and state pension age and earn a minimum of £10,000 annually.

These employees are automatically placed into the scheme, with an option to opt out. 

Salary sacrifice is just a way of paying into your workplace pension - it’s not a different type of pension.

Other salary sacrifice FAQs

Does salary sacrifice affect state pension?

Your state pension is based on your NI contributions record. Because you pay less NI with a salary sacrifice scheme, this may impact your state pension.

However, it is only likely to affect lower earners if their salary sacrifice means they fall below the threshold for paying NI (£242 per week in the 2025/26 tax year).

Can I have a salary sacrifice pension if I’m self-employed?

The scheme is only available via employers, meaning self-employed people can’t have a salary sacrifice pension.

Get expert salary sacrifice and pension advice

Using salary sacrifice to pay into a pension offers a number of distinct benefits. It can help grow your pension and lower your income tax and NI obligations. 

However, it’s only part of the retirement income planning picture.

Let Unbiased match you with a financial adviser who can help you build a pension to deliver the retirement you want.