How to use salary sacrifice to boost your pension and pay less tax

If your employer offers salary sacrifice, you can choose to give up some of your regular pay or bonus in return for a different benefit. 

The choice of benefits varies between employers, but often includes:

• a company car

• childcare vouchers 

• employer pension contributions

• cycle to work schemes

• insurance – like life, dental and health.

Your salary or bonus is then reduced by the cost of any benefits you choose, provided your salary remains above the National Minimum Wage.  

This means you’ll pay less Income Tax and National Insurance, often making your take home pay higher.

When you pay into your pension using salary sacrifice, your wages or bonus are reduced by the same amount. Your employer will then usually:

• pay that amount into your pension, along with their own contribution

• calculate tax and National Insurance on your lower salary.

Your employer will also pay lower National Insurance contributions on your reduced salary, so they can choose to add this saving to your pension as well.  

Provided the total payments into your pension are less than your annual allowance (£60,000 for most), you won’t pay any tax on your pension savings. 

This is because salary sacrifice pension payments are counted as employer contributions, rather than employee contributions – where money is taken from your pay.

This works differently to how tax relief is applied if you make pension contributions in other ways. For more information, see our guide about how pension tax relief works.

Paying into a pension using salary sacrifice typically means you:

• get to keep more of your income as you pay less Income Tax and National Insurance

• might get an extra boost if your employer passes on their National Insurance savings

• might be able to save more into a pension tax-free than other methods.  

But it can have potential drawbacks too, as a lower salary might mean you:

• only qualify for a smaller mortgage

• affect your entitlement to certain benefits, like Statutory Maternity Pay

• get less life insurance cover from your employer, if the amount is based on your salary. 

As salary sacrifice pension payments are employer contributions, the money is also usually locked in your pension until you reach age 55 (57 from April 2028).

This differs to employee contributions, which can usually be refunded if you leave a defined contribution pension within 30 days or a defined benefit pension within two years.

See our guide How to get your pension contributions refunded for more information.

First, check if your employer offers the option of paying into your pension using salary sacrifice. 

If they do, see if they have a salary sacrifice calculator you can use. You can also ask your employer:

• if they will pay some or all their National Insurance savings into your pension

• how much your pay would be after salary sacrifice.

This will help you work out if you’ll gain more overall than making pension contributions from your pay.