Salary sacrifice, net pay or relief at source?

Salary sacrifice: giving up salary for an employer contribution

With an agreed contractual salary sacrifice, your employer pays the sacrificed amount into your pension instead of paying it as cash salary. This can reduce Income Tax and employee National Insurance, and can reduce earnings used for payroll student-loan deductions. It is not simply a personal contribution made after payday. Your employer must offer the arrangement, and cash earnings cannot fall below the National Minimum Wage. The calculator does not check that eligibility.

Net pay: relief through payroll, but not NI relief

Under a net-pay pension arrangement, the employee contribution is deducted before Income Tax is calculated, but does not reduce employee NI earnings. A £2,000 employee contribution therefore generally puts £2,000 into the pension; the tax relief appears through lower Income Tax rather than a provider top-up. Do not choose salary sacrifice merely because your pension is deducted from your payslip—ask payroll which arrangement applies.

Relief at source: enter what you actually pay

Under relief at source, you pay a net contribution and the provider normally adds basic-rate relief. Paying £1,600 means a £2,000 gross contribution: £1,600 divided by 0.8, not £1,600 plus 20%. Higher- or additional-rate taxpayers may need to claim further relief. In our calculator select relief at source and enter the NET amount paid. It assumes eligible additional relief is claimed; your immediate payslip or bank balance can differ.

Worked comparison: £40,000 salary, £2,000 into a pension

Assume 2026/27, the standard allowance, category A NI over twelve equal monthly payments and no student loan or other income. Without a pension, estimated annual take-home is £32,320.04. Sacrificing £2,000 gives approximately £30,880.12 take-home and £2,000 into the pension. A £2,000 net-pay contribution gives £30,720.04 take-home. Paying £1,600 net under relief at source also gives £30,720.04 take-home plus £2,000 gross pension credit. Small NI rounding differences depend on payroll timing. Compare equal pension credits—not equal net payments.

Limits and circumstances to check first

The normal pension annual allowance is £60,000 including employer contributions and relevant defined-benefit growth, but tapering and the money purchase annual allowance may reduce it. Personal tax relief is also constrained by relevant earnings; low/non-earner rules are separate. The calculator does not assess these limits, carry-forward, minimum wage, employer contributions or benefit entitlement. Salary sacrifice can affect salary-linked benefits and borrowing assessments. Scottish Income Tax is not modelled.

Try the comparison in the salary calculator

Enter £40,000 annual salary and choose 2026/27. Select a fixed annual pension amount, then compare salary sacrifice £2,000, net pay £2,000 and relief at source £1,600. The after-tax/no-relief option is a separate cash-deduction model, not a substitute for choosing your actual pension method. Use the yearly/monthly/weekly results and PDF to compare scenarios. Monthly and weekly results are averages, not payroll forecasts.

Official sources

• GOV.UK: Pension tax relief
• HMRC: Salary sacrifice for employers
• GOV.UK: Pension annual allowance