Salary Sacrifice: The Hidden Pension Boost
When your employer offers salary sacrifice for pension contributions, you get more than just income tax relief—you also save National Insurance. Here's how to make the most of this valuable benefit.
How Salary Sacrifice Works
Instead of receiving salary and then contributing to your pension, you agree to reduce your contractual salary. In exchange, your employer pays that amount directly into your pension.
Because the money never becomes your salary, you don't pay income tax or National Insurance on it. And often, your employer will pass on their NI savings too.
The Numbers: £5,000 Pension Contribution
| Normal Contribution | Salary Sacrifice | |
|---|---|---|
| Gross amount | £5,000 | £5,000 |
| Employee NI saved (8%) | £0 | £400 |
| Employer NI saved (13.8%) | £0 | £690 |
| Potential extra in pension | - | £400-£1,090 |
*Depends on whether employer shares their NI saving
The Double Benefit
With regular pension contributions, you get income tax relief but still pay National Insurance on your full salary. Salary sacrifice eliminates both:
- Employee NI: 8% on earnings between £12,570 and £50,270; 2% above
- Employer NI: 13.8% on all earnings above £9,100
Many employers pass on some or all of their NI saving, adding even more to your pension.
Check your scheme: Ask HR whether your employer shares their NI saving. If they keep it all, salary sacrifice is still beneficial—but less so.
Who Benefits Most?
Higher Rate Taxpayers
For higher rate taxpayers, salary sacrifice can be simpler than claiming relief through self-assessment. The full benefit happens automatically through payroll.
Those Losing Child Benefit
If your income is between £60,000 and £80,000, salary sacrifice can reduce your "adjusted net income" and recover some or all of your Child Benefit.
Those Near the Personal Allowance Taper
Between £100,000 and £125,140, you effectively pay 60% marginal tax. Salary sacrifice into pension brings your adjusted income down, potentially recovering some personal allowance.
Things to Consider
Lower Reported Salary
Your official salary falls. This might affect:
- Mortgage applications (though lenders often look at pre-sacrifice salary)
- Life insurance and income protection cover
- Statutory maternity/paternity pay (if you fall below thresholds)
National Minimum Wage
You cannot sacrifice salary to below the National Minimum Wage. This limits how much lower earners can sacrifice.
Reduced State Pension Entitlement
If your post-sacrifice salary falls below the Lower Earnings Limit (£6,396 in 2024/25), you might not qualify for NI credits toward State Pension. Most employees won't hit this limit.
Maximising the Benefit
- Check if your employer offers salary sacrifice (not all do)
- Ask whether they share their NI saving
- Consider timing increases with pay rises
- Watch for thresholds (Child Benefit, personal allowance)
- Keep records for mortgage or lending applications
How Talk Through Wealth Helps
Model the impact of salary sacrifice on your finances:
- Compare salary sacrifice vs. regular contributions
- Calculate the impact on Child Benefit and personal allowance
- See the long-term pension boost from NI savings
- Factor in employer NI sharing arrangements
- Optimise contribution levels around tax thresholds
Optimise Your Salary Sacrifice
Join the waitlist to model salary sacrifice in your retirement plan.
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