Part of our complete guide to employer payroll.
How it actually works
Salary sacrifice means agreeing to give up part of your salary in exchange for your employer paying the equivalent amount into your pension directly, as an employer contribution rather than a deduction from your take-home pay. The pension amount ends up the same, but how it gets there changes the tax and National Insurance treatment.
Why it saves money for both sides
The sacrificed amount never counts as salary for National Insurance purposes. Since employer pension contributions aren't subject to National Insurance at all, both the employee and the employer save NI on the sacrificed portion, money that would otherwise have been taxed as salary.
Key point: This is different from simply contributing more to your pension out of your take-home pay. A personal contribution from net pay doesn't carry the same NI saving, salary sacrifice specifically restructures the payment so it never counts as salary in the first place.
Why employers often encourage it
Because employers save their own employer National Insurance on the sacrificed amount too, many offer to pass some or all of that saving back to employees as an additional pension contribution on top, effectively a shared benefit from the restructuring.
What's changing from 2029
Announced changes affect how salary sacrifice pension arrangements are treated for National Insurance purposes from 2029. The specifics were still being finalised at the time of writing, so treat any particular figure as provisional and check the latest detail closer to the date.
Considering salary sacrifice? Book a free consultation and we'll work out whether it makes sense for your specific salary and pension setup, see our salary sacrifice calculator for a quick estimate.
Frequently asked questions
How does salary sacrifice for pensions work?
You agree to give up part of your salary in exchange for the equivalent amount being paid into your pension directly by your employer, as an employer contribution rather than a deduction from your pay.
Why does this save National Insurance for both employer and employee?
Because the sacrificed amount never counts as salary for NI purposes, it's paid as an employer pension contribution instead, which isn't subject to National Insurance at all, unlike salary.
Is salary sacrifice the same as just paying more into my pension yourself?
No, personal pension contributions from your take-home pay don't carry the same NI saving, salary sacrifice is specifically structured so the contribution never counts as salary, which is where the saving comes from.
What's changing from 2029?
Announced changes affect how salary sacrifice pension contributions are treated for National Insurance from 2029, check the latest detail with us closer to the date, as the specifics were still being finalised at the time of writing.