Salary sacrifice means agreeing with your employer to give up part of your salary in return for a benefit, usually a bigger pension contribution. Because the salary you give up is never paid to you, you pay no Income Tax, no National Insurance and no student loan repayment on it. The result is that a £1,000 pension contribution can cost you only £580 to £720 of take-home pay, and less still in some salary bands.
This guide works through real 2026/27 examples, all from the same engine as our salary sacrifice calculator, and explains the catches: the minimum wage rule, the effect on mortgages and other benefits, and the National Insurance cap planned for 2029.
How salary sacrifice saves money
Compare two ways of putting £1,500 a year into a workplace pension on a £30,000 salary in England. Paid out of your salary under the “net pay” or “relief at source” methods, you get Income Tax relief but still pay National Insurance on the full £30,000. By salary sacrifice, your salary becomes £28,500 and the £1,500 goes straight into the pension, so both tax and National Insurance fall.
| £30,000 salary, £1,500 sacrificed into a pension | Amount |
|---|---|
| Take-home pay before | £25,119.60 |
| Take-home pay after | £24,039.60 |
| Fall in take-home pay | £1,080 |
| Income Tax saved | £300 |
| National Insurance saved | £120 |
| Paid into your pension | £1,500 |
So £1,500 goes into your pension for £1,080 out of your pocket: a saving of £420, or 28% of the amount sacrificed. That 28% is simply the basic rate of tax (20%) plus the main rate of employee National Insurance (8%).
What it saves at different salaries
The saving on each pound you sacrifice is your marginal rate of tax, National Insurance and student loan on the slice of salary you give up. Four 2026/27 examples, each sacrificing a pension contribution in England, Wales or Northern Ireland:
| Salary and sacrifice | Cost to you | Saving | Saving as a share |
|---|---|---|---|
| £30,000, sacrifice £1,500 | £1,080 | £420 | 28% |
| £45,000 with a Plan 2 loan, sacrifice £2,250 | £1,417.50 | £832.50 | 37% |
| £60,000, sacrifice £3,000 | £1,740 | £1,260 | 42% |
| £105,000, sacrifice £5,000 | £1,900 | £3,100 | 62% |
The Plan 2 example saves an extra £202.50 because student loan repayments are 9% of earnings above the threshold, and sacrificed salary is not counted. The £105,000 example is the most striking: bringing income back down to £100,000 restores £2,500 of Personal Allowance, so £5,000 goes into the pension for just £1,900 of take-home pay. Our guide to the £100,000 tax trap explains why.
In Scotland the saving can be larger, because the Scottish intermediate and higher rates are 21% and 42%. On £45,000 with £2,250 sacrificed, a Scottish taxpayer saves £933.48 against £630 for the same salary elsewhere in the UK (without a student loan).
Your employer saves too
Employers pay 15% National Insurance on earnings above £5,000 a year. When you sacrifice £1,500, your employer saves £225 of its own National Insurance. Some employers add part or all of that saving to your pension. If yours adds all of it, the £30,000 example puts £1,725 into your pension for the same £1,080 of take-home pay. It is worth asking HR whether your employer shares its saving.
Cycle to Work and other schemes
Pensions are not the only exempt benefit. Under the Cycle to Work scheme, giving up £1,000 of a £30,000 salary for a bike costs £720 of take-home pay, a saving of £280, because tax and National Insurance both fall. Electric car schemes work in a similar way, but you pay company car tax on the car, so use the EV salary sacrifice calculator for those.
Most other benefits fall under the “optional remuneration” rules. For them you still pay Income Tax on the salary you gave up, so only National Insurance falls. Sacrificing £1,200 of a £30,000 salary for such a benefit saves just £96 a year: the 8% National Insurance.
The catches
You cannot go below the minimum wage
A sacrifice must not take your pay below the National Living Wage, £12.71 an hour for workers aged 21 and over from April 2026. On £26,000 for 37.5 hours a week, sacrificing £1,500 would leave £12.56 an hour, so your employer cannot agree it. A sacrifice of £1,000 leaves £12.82 an hour and is allowed.
A lower salary can affect other things
- Mortgages: lenders may use your salary after sacrifice when working out how much you can borrow.
- Statutory pay: Statutory Maternity Pay, Statutory Sick Pay and similar payments depend on your earnings, so a big sacrifice can reduce them or make you ineligible.
- Life cover and pay rises: some employers base life insurance or percentage pay rises on the salary after sacrifice. Check your scheme’s rules.
- Universal Credit and tax credits: lower earnings can mean more help, which is usually a good thing, but it does change the sums.
The National Insurance cap from April 2029
The government has announced that from April 2029 only the first £2,000 a year of pension contributions made by salary sacrifice will be free of National Insurance. Contributions above £2,000 will still save Income Tax, but both you and your employer will pay National Insurance on them. Until then, the full saving applies.
Is it worth it?
For most employees whose employer offers it, yes: salary sacrifice is the cheapest way to pay into a pension, because it saves National Insurance on top of Income Tax. It is most valuable for higher-rate taxpayers, anyone repaying a student loan, and anyone with income between £100,000 and £125,140. The main reasons to hold back are a mortgage application in the near future, a pay level close to the minimum wage, or plans to take family leave soon.
To see the effect on your own pay, use the salary sacrifice calculator, or compare the different ways of getting tax relief with the pension tax relief calculator.