What is salary sacrifice – when dealing with pensions !

Quite simply, if you employer offers you salary sacrifice.

You choose to give up some or all of any income or salary in return for any specific benefit.

The range of benefits offered will obviously vary between companies and different employers. But they will form the following main categories:

• Company car or vehicle
• Employer pension contributions
• Childcare vouchers
• Cycle to work schemes
• Health benefits – such as free life insurance, dental or health and medical plans

By offering such range of benefits your pay should then be reduced to cover such benefits that you are taking advantage of. Provided that you rate of pay should remain above the current minimum wage, in payment at that time.

An advantage to taking such benefits means that you should pay less tax and NI (national insurance) on your tax home pay. Resulting in you receiving more funds in your pay packet each month or week.

So how does salary sacrifice actually work – with regard to pensions ?

If you make a contribution into your workplace pension scheme, your salary, income, wages plus any bonus you receive is usually reduced by that exact amount.

So an employer – will usually pay that amount into the respective pension plan, along with their required contribution.

They will then pay lower tax and NI contributions on your reduced salary / income. A your employer is also due to pay NI contributions (at rates set by the Government), they will also pay reduced costs. So it can be seen at advantageous to a company as well.

Am I limited into how much I can contribute ?

Everybody in employment has somewhat called “The annual allowance”, so you can contribute up to £ 60,000 each tax year into a pension. Or a lower amount if you earn a lower salary.

So if you are earning £ 30K per annum, you can contribute up to £ 30K each tax year.

The total amount contributed will include your contributions, plus your employer’s contributions and well as any tax relief added by the government. Usually claimed on your behalf and added automatically into your scheme.

As your contributions are added through payroll by your employer, you won’t pay any tax on your pensions savings into your workplace pension.

Through the introduction of Auto Enrolment in 2012, most employers have to pay a minimum amount into your scheme currently 8%. Of which 4% is paid by employee, 3% is paid by employer and 1% tax relief is added on your behalf.

Some companies or employers may have better contributions rates to attract staff, or as part of a rewarding benefits package to entice staff to join that organisation.

See blog post on Auto enrolment via this link: https://moneyminted.co.uk/auto-enrolment-pensions-a-basic-introduction

BE AWARE ! RECENT BUDGET CHANGE

As announced in budget for November 2025, the limit or cap will be introduced.

So from April 2029, salary sacrifice will have a limit of £ 2,000 on new pension contributions each year that are not subject to national insurance.

From this date, both the employer and employee will now incur national insurance on the contributions.

At present, the worker saves up to 8% in employee NI on the cost of their personal pension contributions.

So let’s look at some simple examples !

Salary £ 40,000 – employee contribution (6%) = £ 2,400, amount over cap £ 400, so reduction in take home pay of £ 32

Salary £ 50,000 – employee contribution (6%) = £3,000, amount over cap £ 1,000, so reduction in take home pay of £ 80

These amounts may not be a great amount of money. But it erodes net pay each month, and does nothing to enhance the advantages and benefits to entice people to invest in pensions. Which is seen as one of the most tax efficient long term saving products around. 

Worse still, the rates could be changed or altered in future years.

Let’s say by tinkering by this current government or future party.

As we all know once things are introduced they are rarely abolished, but the rates and limits are always lowered to grab more tax through simple stealth measures.

Is this method my best option when making contributions ?

Salary sacrifice has some very nice benefits and attractions on offer being:

• You get to more income as you pay less tax and NI through PAYE.
• You could afford to increase level of contributions to increase pot value quicker
• could get a bigger boost if your employer gives you the NI savings.
• The admin of your pensions could become simpler as you stay in same scheme

Are there any drawbacks or disadvantages ?

• Your money is locked away until age 55 called the minimum pension age (although this will increase to age 57 in April 2027), so you may not take any money back quickly.
• If you are earning in effect a lower salary, you may not be able to get a larger mortgage (as borrowing sum is normally a multiple of your salary)
• If may affect certain work benefits life statutory sick pay or maternity pay
• An employer may offer life insurance or death in service benefits (covering so many years salary) it may be paid out on lower salary amount.

Do all employer’s offer salary sacrifice ?

Not all employer’s will offer this to employee’s but it’s seen as a goodwill gesture and is promoted by the government and other bodies as incentive to employee’s.

Plus the range of benefits on offer, will depend upon the generosity of an employer. Can they afford to offer all staff across the organisation at great expense. Or are the variety and level of benefits somewhat reduced if you work for a smaller company.

Some large employer’s will offer very appealing and attractive benefits to entice staff to join that employer.

A previous employer that I worked for in the past offered a DC pension whereby employee’s could pay up to 10% of their salary, and this was matched up to 10% by the respective employer. It was substantially better than elsewhere, but it was done to entice staff.

If you are going to join a new employer, do some basic background checks on the benefits and pension scheme on offer.

Or raise key questions during the application or interview process.

A simple illustration !

An employee is earning a salary of £ 24K per annum, and they contribute £ 2,000 into a pension.

Their new pay is counted at £ 22K, so they will pay less tax and NI on that new lower salary.

The employer will also pay less NI on new lower salary of £ 22K, so it saves them money also. So it’s a win / win for both parties involved.

Which could through the goodwill of the employer be passed on the employee, thereby increasing the pot value.

So how it works – pre salary sacrifice !

Employee has gross taxable income of £ 24K (as per 2025/26) – they pay tax and NI of £ 3200.40 in the tax year.

They make a contribution of £ 960 (net into the pension), plus tax relief of £ 240, so gross amount added to pension is £ 1,200 per annum. their tax home pay should be £ 19,839.60

So how it works – with salary sacrifice !

Employee chooses to give up £ 1,333.33 of gross salary towards pension contributions. So take home pay stays at £ 19,839.60.

But gross salary is reduced to £ 22,666.67 less £ 2828.07 (tax & N), but they have £ 1,333,33 added into a workplace pension on their behalf. So consider it free money.

Be aware !

Remember: 

If you found this blog post useful and informative. Check out my other posts on pensions, savings, investments and investment books that I recommend on https:moneyminted.co.uk

The world of savings and investing should be rewarding over the long run, it’s not a get rich quick scheme. But you will achieve your goals and aims in future, If you think long term !