UK pension guide · Last reviewed 25 July 2026

Pension salary sacrifice: pay, tax and pension funding

Pension salary sacrifice, sometimes called salary exchange, is an agreement to give up part of future contractual cash pay in return for an employer pension contribution. It is not simply a deduction from pay: the employment terms and the source of the pension contribution change.

How the arrangement works

The employee and employer agree a lower cash salary or bonus entitlement. The employer then pays the exchanged amount into the pension as an employer contribution, normally alongside any existing employer funding.

A valid arrangement generally needs to be agreed before the affected pay is earned. An employer decides whether to offer salary sacrifice, which payments are eligible, how changes are made and whether employees can leave or vary the arrangement.

Income Tax and National Insurance

Under the rules modelled by the calculator, PAYE Income Tax and employee National Insurance are calculated using the lower cash pay. The employer can also pay less employer National Insurance. These effects can make the reduction in take-home pay smaller than the amount entering the pension.

This is different from relief at source, where an individual pays a net contribution and the provider adds basic-rate relief, and from net pay, where an employee contribution is deducted before Income Tax through payroll. Salary-sacrifice payments are treated as employer contributions rather than receiving a separate provider top-up.

Employer National Insurance sharing

An employer may choose to add some or all of its National Insurance saving to the pension, but it does not have to do so. Ask whether a saving is shared, how the percentage is calculated and whether it can change.

Keep existing employer pension contributions separate from funding created by the exchange. A result labelled “total pension funding” can include both, so it is important to compare the increase rather than treating the whole amount as a new benefit.

Worked example

For the 2025 to 2026 tax year, the calculator models an employee in England earning £50,000 who exchanges £5,000 of salary. With no student loan or existing employee contribution, annual take-home pay falls by about £3,600 rather than the full £5,000.

The illustration shows £1,000 less Income Tax and £400 less employee National Insurance. If the employer already contributes £1,500 and shares half of its estimated £750 National Insurance saving, total annual pension funding is £6,875: £5,000 exchanged pay, £1,500 existing employer funding and £375 shared saving.

Compare your figures with the Salary Sacrifice Calculator

Contractual pay and notional salary

Lower contractual pay can affect overtime, pay rises, bonuses, workplace-pension calculations, life cover and other salary-linked benefits. Some employers continue to calculate selected benefits using a notional pre-sacrifice salary, but this is a scheme choice rather than an assumption to make.

Borrowing assessments can also use salary information differently. Confirm what the employer will report and what evidence a prospective lender may require.

Statutory payments and National Minimum Wage

Salary sacrifice can affect earnings-related statutory payments and benefit entitlement because assessed cash earnings are lower. The effect depends on the relevant calculation period and personal circumstances.

An arrangement cannot reduce National Minimum Wage pay below the applicable hourly minimum. An annual salary floor alone is not enough to test this because working hours and the relevant pay-reference period matter. The calculator can warn against a floor you enter, but it does not perform a National Minimum Wage compliance calculation.

Pension limits still matter

Employer pension contributions count towards pension input for the Annual Allowance. The tapered Annual Allowance, Money Purchase Annual Allowance, carry forward and other pension arrangements can affect an individual position.

The calculator compares payroll effects but does not determine whether an Annual Allowance tax charge arises or whether salary sacrifice is suitable. Check total pension input across all relevant arrangements.

Announced change from April 2029

The government has announced that, from 6 April 2029, salary and bonuses exchanged for pension contributions above £2,000 per tax year will be subject to employee and employer Class 1 National Insurance. Income Tax treatment and ordinary employer pension contributions are described separately in the announced policy.

The current calculator does not model this future change. Implementation details and personal circumstances may alter the eventual outcome, so review current legislation and employer communications before relying on a projection for 2029 or later.

Questions to ask your employer

Which salary or bonus payments can be exchanged, and when must the choice be made?
How will the arrangement affect contractual pay and payslip reporting?
Does the employer share any National Insurance saving?
Which benefits use actual salary and which use a notional pre-sacrifice salary?
Could statutory pay, life cover, overtime or borrowing evidence be affected?
What safeguards prevent pay falling below the National Minimum Wage?
How can the arrangement be changed after a significant life event?

Related calculators and guide

Official and independent information

This guide is educational information, not tax, employment, pension or financial advice. Confirm the arrangement with your employer and pension provider.