Salary sacrifice funding options

Last updated 6 April 2026

Key points

Employees can choose to benefit from either a higher pension contribution or higher take home pay when using salary sacrifice
The employee’s pension savings can be boosted if the employer pays part or all of their National Insurance (NI) savings into their pension scheme
New salary sacrifice arrangement can cause tapered annual allowance problems for high-earning employees

Salary sacrifice - options

There are two ways an employee can potentially benefit from the NI savings obtained through salary sacrifice arrangements:

They receive an increased pension contribution, but keep their take home pay the same
They keep their pension contribution the same level but receive an increase in their take home pay

In addition, further NI benefits can be obtained if the employer is willing to add part or all of their own NI saving to the pension contribution.

From April 2029, there will be no NI saving on any salary or bonus sacrifices over £2,000 a year.

The actual options available to the employee will depend on what the employer is willing to offer. Any salary sacrifice will need the involvement and cooperation of the company’s HR and payroll departments.

Increased pension contribution - same take home pay

Example

Aaron is a basic rate taxpayer, earning £34,500 a year. He is a member of his employer’s group stakeholder scheme and currently pays a monthly contribution of 10%, while his employer pays 8%.

Aaron’s employer is keen to help his employees maximise their pension savings and will allow Aaron to make his pension contributions by salary sacrifice. Aaron chooses to keep his take home pay the same, which means he can pay more into his pension by salary sacrifice due the savings made in his employee NI.

The following illustrates how salary sacrifice affects his pension contribution.

Tax year 2025/26	Before sacrifice	After sacrifice
Basic salary	£34,500	£30,667
Income tax	£4,386	£3,619
Employee NI	£1,754	£1,448
Net Employee pension contribution	£2,760	n/a
Net take home pay	£25,600	£25,600
Total contributions to Aaron’s pension
Gross employee pension contribution	£3,450	n/a
Gross employer pension contribution	£2,760	£6,593
Total pension contributions	£6,210	£6,593

Employer NI *	£4,425	£3,850

* Aaron’s salary sacrifice has saved his employer £575 of NI.

Paying the contribution by salary sacrifice has boosted Aaron’s pension savings by £383 - a 6.2% increase over pre-sacrifice contributions - and his take home pay remains the same
If the employers NI saving is also paid into Aaron’s pension, the total contributions would be £7,168 - a 15.4% increase on pre-sacrifice contributions.

Increased take home pay - same pension contribution

Example

Janet is a higher rate taxpayer, earning £60,000 a year. She is a member of her employer’s group personal pension scheme, with matching monthly contributions of 5% employee and 5% employer. The employer is keen to keep costs down for employees and offers to pay their employees' share by salary sacrifice.

The following illustrates how salary sacrifice affects Janet's take home pay.

Tax year 2025/26	Before sacrifice	After sacrifice
Basic salary	£60,000	£57,000
Income tax	£11,432	£10,232
Employee NI	£3,211	£3,151
Net employee pension contribution	£2,400	n/a
Add extra 20% tax relief reclaimed*	£600	n/a
Net take home pay – includes tax claim	£43,557	£43,617
Total contributions to Janet’s pension
Gross employee pension contribution	£3,000	n/a
Gross employer pension contribution	£3,000	£6,000
Total pension contribution	£6,000	£6,000

Employer NI**	£8,250	£7,800

* As Janet is a higher rate taxpayer, she will need to claim the extra £600 tax relief via her self-assessment return.

** Janet’s salary sacrifice has saved her employer £450 NI. If the employer chooses to pay their NI saving into Janet’s pension the total contribution will increase to £6,450.

Paying the contribution by salary sacrifice has increased her net take home pay by £60.

In this example the increase to take home pay is minimal because Janet’s income is above the NI upper earnings limit and the NI saving is just 2%.

Anyone earning less than the upper earnings limit will see a greater increase in their take home pay as a result of an 8% NI saving.

Redundancy sacrifice

When someone is made redundant, the payment they receive when they leave may consist of various elements. When sacrificing part of the payment in exchange for a pension contribution, it’s important to understand which part of the payment is to be sacrificed. Each component may have different tax and NI treatment.

Salary, bonus, holiday pay and payments in lieu of notice are fully taxable and subject to both employee and employer NI.

The actual termination payment, which is for loss of service, is not subject to employee NI and the first £30,000 will be tax free. However, since 6 April 2020, employer NI has been payable on the taxable element of this payment.

Generally, it makes sense to sacrifice payments which are subject to tax and NI first. And if sacrificing part of the termination payment, only the amount above £30,000.

Annual allowance tapering and the effect of sacrifice arrangements

Salary, bonus or redundancy sacrifice arrangements can affect pension funding for high-earning employees who may become caught by the tapered annual allowance. This is because any new sacrifice arrangement entered into after 8 July 2015 would need to be added to the 'threshold income' calculation. But making a personal contribution instead could perhaps avoid the tapering because personal contributions reduce threshold income.

If the client’s threshold income is above £200,000 and 'adjusted income' is greater than £260,000, the client’s annual allowance will be tapered.

Clients with existing pre-8 July 2015 salary sacrifice agreements need to be careful that a change to their existing agreement doesn’t bring it into the threshold income calculation.

If the existing salary sacrifice wording refers to a fixed monetary amount, an increase in the amount sacrificed is likely to need a new agreement. Ideally the new agreement should just cover the additional amount to be sacrificed and leave the existing sacrifice agreement in place. This would ensure that only the additional amount is brought into the threshold income calculation.

Where the new agreement covers both the existing and new amounts to be sacrificed there's a possibility that the total amount is classed as a new salary sacrifice arrangement, meaning the total value must be included in the client’s threshold income calculation.

Some existing sacrifice agreements may include some flexibility for extra saving - for example, where an agreement relates to a percentage of salary and the employee gets a pay rise. An increase in these circumstances should not be treated as a new agreement.

Where existing agreements are in place, individuals may need to obtain specialist advice to determine if a new arrangement has been entered into.

Sacrificing contractual redundancy payments for a pension contribution can also affect funding for high earners who could become caught by the tapered annual allowance.

A redundancy sacrifice will require a new exchange agreement, meaning that the amount sacrificed will be added to the client’s threshold income.

Where a client’s adjusted income is more than £260,000, it might be better for the client to receive the redundancy payment and make a personal contribution instead, as this could avoid the tapering.

Our 'Annual allowance' guide provides full information on the tapered annual allowance.

Example - redundancy sacrifice and the tapered annual allowance

In 2025/26 Ray received a salary of £155,000 and an employer pension contribution of £12,000.

In March 2026 he was made redundant and was contractually entitled to a redundancy payment of £150,000. The employer agreed to allow him to sacrifice up to £120,000 (the taxable part of the payment) into his pension scheme.

Ray had unused annual allowance of £72,000 from the previous three tax years.

Redundancy payment – sacrificed

If Ray had sacrificed the taxable part of his redundancy payment, his threshold income would have been £155,000 + £120,000 (redundancy payment) = £275,000 which would have meant that his annual allowance would be tapered.

This is because Ray’s adjusted income would have been £155,000 + £12,000 + £120,000 = £287,000. His £60,000 annual allowance would be reduced by £13,500 (£287,000 minus £260,000/2) leaving him an annual allowance of £46,500.

Ray’s total pension contribution for this tax year would have been £12,000 + £120,000 = £132,000 but his annual allowance would have just been £72,000 (carry forward) + £46,500 (tapered AA) = £118,500.

As his contribution would have exceeded his annual allowance by £13,500, he would have been subject to an annual allowance tax charge.

Redundancy payment – not sacrificed

Instead, Ray received the redundancy payment then made a pension contribution personally.

Ray’s threshold income was £155,000 + £120,000 (taxable redundancy) - £120,000 (pension contribution) = £155,000.

Ray’s adjusted income was £155,000 + £12,000 + £120,000 = £287,000.

But as his threshold income was less than £200,000, his annual allowance was not tapered and the full £60,000 annual allowance was available.

Ray’s total pension contribution for this tax year was £12,000 + £120,000 = £132,000 and his annual allowance was £72,000 + £60,000 = £132,000.

As his contribution was within his annual allowance, there was no annual allowance tax charge.