How salary sacrifice works
With salary sacrifice you agree to a lower gross salary, and your employer pays the difference straight into your pension. Because your headline salary is reduced, both your income tax and your National Insurance are worked out on the smaller figure. The full sacrificed amount lands in your pension with no tax or NI taken off, so unlike a normal contribution there’s nothing to claim back.
That NI saving is what makes salary sacrifice more efficient than paying into a pension the usual way. A standard contribution recovers income tax but not National Insurance. Sacrifice recovers both, which is why the “true cost” of each pound in your pension is often around 52p to 72p of take-home pay.
The 60% tax trap: £100,000 to £125,140
If your income sits between £100,000 and £125,140, your personal allowance is being withdrawn at £1 for every £2 you earn, creating an effective marginal rate of around 60%. Sacrificing salary back below £100,000 can restore your allowance, so each pound sacrificed in this band saves an unusually large amount of tax. The calculator captures this automatically.
Frequently asked questions
Is salary sacrifice worth it for pensions?
Usually yes. You avoid income tax and National Insurance on the sacrificed amount, so £100 into your pension costs most people between £58 and £72 of take-home pay. It's one of the most tax-efficient ways to save for retirement.
How much can I salary sacrifice into my pension?
There's no legal limit on the sacrifice itself, but your salary can't drop below the National Minimum Wage. Tax relief is limited by the annual allowance (£60,000 for most people in 2025-26 and 2026-27), and from April 2029 the National Insurance saving will be capped at £2,000 a year.
What is the 60% tax trap and can salary sacrifice fix it?
The 60% tax trap hits income between £100,000 and £125,140. Over that band your £12,570 personal allowance is withdrawn at £1 for every £2 you earn, so on top of 40% income tax you lose allowance too, giving an effective marginal rate of about 60%. Salary sacrifice into a pension lowers your adjusted net income, so sacrificing enough to bring it back under £100,000 restores the full allowance. Each pound sacrificed in that band can save around 60p in tax, before the National Insurance saving on top.
Does salary sacrifice affect my mortgage or benefits?
It can. Lenders assess your reduced gross salary, so borrowing capacity may fall. It can also lower earnings-linked benefits such as statutory maternity pay, redundancy pay and life cover if these are based on your new lower salary. Check before sacrificing a large amount.
How much tax will I save with salary sacrifice?
You save income tax at your marginal rate (20%, 40% or 45%) plus employee National Insurance (8% below £50,270, 2% above) on everything you sacrifice. A higher-rate taxpayer earning under £50,270 who sacrifices £100 keeps roughly £52 in take-home terms while £100 goes into their pension.
Is salary sacrifice better than paying into a pension the normal way?
Generally yes, because you also save National Insurance, which normal pension contributions (relief-at-source or net pay) don't recover. The catch is the lower headline salary, which can affect mortgages and some benefits.
Covers England, Wales & Northern Ireland. General information, not financial advice.
