Salary sacrifice is a way to boost your pension savings and take home more pay. Here’s how it works.
What Is Salary Sacrifice?
Salary sacrifice is a way to save more money and pay less tax.
Here’s how it works: you agree to give up part of your salary, and your employer uses that amount to put money into your pension for you.
Because your salary is now lower "on paper", you pay less National Insurance (NI) and possibly less income tax, which means more take-home pay. But don’t worry: You’re not missing out. In fact, you’re gaining. You get the same (or better) pension contribution, plus extra money in your pocket now.
It’s a clever way to get more money in your pocket today while still saving for your future.
Real-life example
Let’s say you earn £50,000 a year and put 5% (or £2,500) into your pension:
Before salary sacrifice:
You pay pension from your salary.
Your take-home pay after tax and pension: £37,519.60
After salary sacrifice:
Your salary drops to £47,500 (on paper).
The £2,500 pension is now paid directly by your employer.
Your take-home pay increases to £37,719.60.
✅ That’s an extra £200 in your pocket - every year - with no extra effort.
Why Salary Sacrifice can be a smart move
Using salary sacrifice is one of the easiest ways to get more value from your salary. Here’s why people love it:
More take-home pay. You keep more of what you earn thanks to lower NI contributions.
Bigger pension savings. You still save the same amount, or even more, for retirement.
Extra employer contributions. Some companies also add their own NI savings into your pension.
All this happens automatically, no extra forms, no extra cost. It’s just a smarter way to save.
Is there a catch?
Salary sacrifice works well for most people, but there are a few things to watch out for. Since it changes your official salary, it can affect anything that’s based on how much you earn. Here are some things to consider before you decide to switch:
Low earners might not qualify. If using salary sacrifice would cause your salary to drop below minimum wage, it can’t be used.
Salary-based benefits might change. Things like mortgage applications or life insurance could be affected because your "official" salary looks lower.
Statutory maternity pay might be lower. Because it's based on your average salary, a lower salary may mean slightly less pay during maternity leave.
These are good to keep in mind, but for most people, the benefits outweigh the drawbacks.