Key Takeaways
- ✓Pension contributions save Income Tax + National Insurance on every pound contributed
- ✓Salary sacrifice is more tax-efficient than "relief at source" pensions
- ✓The annual allowance is £60,000 (2024/25) - but can taper down to £10,000 for highest earners
- ✓You can carry forward unused allowances from the previous 3 years
What is Salary Sacrifice?
Salary sacrifice (also called "salary exchange") is an arrangement where you give up part of your salary in exchange for a non-cash benefit—in this case, employer pension contributions. The rules for this arrangement are set out by HMRC's salary sacrifice guidance .
The key advantage: the sacrificed salary is never taxed. You avoid Income Tax AND National Insurance on it.
How It Works:
- 1You agree to reduce your gross salary by a certain amount (e.g., £500/month)
- 2Your employer takes that £500 and pays it directly into your pension
- 3Because your "official" salary is now lower, you pay less Income Tax and NI
- 4Your employer also saves on NI (13.8%) - some employers pass this saving back to you
Salary Sacrifice vs Relief at Source
| Feature | Salary Sacrifice | Relief at Source |
|---|---|---|
| Who contributes | Employer (on your behalf) | You (employee) |
| Income Tax saved | ✓ Automatic | ✓ Via self-assessment |
| National Insurance saved | ✓ Yes (8-12%) | ✗ No |
| Student loan repayment | Reduced (lower salary) | No change |
| Mortgage applications | Lower stated income | No impact |
Important: Salary sacrifice reduces your "official" salary, which can affect statutory pay (maternity, sick pay), life assurance multiples, and mortgage affordability. Check with your employer about protections.
Real Example: £60,000 Salary
Let's say you earn £60,000 and want to contribute an additional £500/month (£6,000/year) to your pension.
Without Salary Sacrifice
With Salary Sacrifice ✓
Extra Take-Home with Salary Sacrifice:
£41,254 - £38,374 = £2,880/year
Same £6,000 pension contribution, but you have £2,880 more in your pocket because you saved on tax and NI.
Understanding Annual Allowance
The Annual Allowance is the maximum amount you can contribute to your pensions in a tax year while still receiving tax relief. For 2024/25, it's £60,000.
Who's Affected by the Tapered Annual Allowance?
If your "threshold income" exceeds £200,000, your annual allowance reduces by £1 for every £2 over £260,000 (adjusted income), down to a minimum of £10,000.
Example:
- • Adjusted income of £300,000
- • Excess: £300,000 - £260,000 = £40,000
- • Taper: £40,000 ÷ 2 = £20,000 reduction
- • Your allowance: £60,000 - £20,000 = £40,000
Carry Forward Rule
You can carry forward unused annual allowance from the previous 3 tax years, provided you were a member of a registered pension scheme in those years. This can allow contributions well above £60,000 in a single year if you have unused allowances.
Common Questions
Can I still access my pension early if I salary sacrifice?▼
Pension funds are locked until age 55 (rising to 57 in 2028) regardless of whether you used salary sacrifice or relief at source. Early access is only permitted in exceptional circumstances (serious ill health).
Does salary sacrifice affect my state pension?▼
As long as your sacrificed salary stays above the Lower Earnings Limit (£6,396 for 2024/25), you'll still earn National Insurance credits toward your state pension. Most people earning enough to consider salary sacrifice are well above this threshold.
Can I reverse a salary sacrifice arrangement?▼
Yes, but typically only during specific windows (e.g., annual review periods) or due to life events (marriage, birth, divorce, redundancy). Check your employer's policy—HMRC requires that the arrangement isn't too flexible to prevent abuse.
What happens if I exceed my annual allowance?▼
You'll pay a tax charge on the excess via self-assessment. The charge is equal to your marginal tax rate on the excess amount. This effectively claws back the tax relief you received. Employer contributions count toward the allowance.
Model Your Pension Savings
Use our calculator to see exactly how much salary sacrifice could save you in tax and National Insurance.
About This Guide
Written by the Tax Trap Calculator editorial team · Last reviewed February 2026 for the 2025/26 tax year. Pension rates and allowances sourced from HMRC's pension annual allowance guidance. This guide is for informational purposes only. Always consult a qualified financial advisor.
© 2026 Tax Trap Calculator. Not financial advice.
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