Salary Sacrifice Guide

Salary Sacrifice: How to Save Tax and NI on Your Pension

Salary sacrifice is one of the most effective — and underused — ways to boost your pension while reducing your tax bill. If your employer offers it, you could save both Income Tax and National Insurance on every pound you contribute.

What Is Salary Sacrifice?

Salary sacrifice (also called "salary exchange") is an arrangement where you agree to reduce your contractual salary in exchange for a non-cash benefit — most commonly, pension contributions.

Because your official salary is lower, you pay less tax and less National Insurance. Your employer also saves on their NI contributions, and many pass some or all of this saving to your pension.

How Much Can You Save?

Here's a real example for a £50,000 salary in 2026/27:

At higher tax rates, the savings are even bigger. A higher-rate taxpayer (40%) sacrificing £500/month saves £210/month in tax and NI combined.

Does Salary Sacrifice Affect Anything Else?

Yes — because your contractual salary is lower, it can affect:

• Mortgage applications — lenders use your reduced salary for affordability checks
• Life insurance — cover is often based on your salary
• Statutory payments — maternity pay, sick pay, redundancy pay are based on your lower salary
• State pension — if your salary drops below the Lower Earnings Limit, you might miss NI credits

Most employers set a "protected salary" floor (e.g., you can't sacrifice below £20,000) to avoid these issues.

How to Set It Up

Salary sacrifice must be arranged through your employer. You cannot do it yourself. Steps:

1. Ask your HR or payroll team if salary sacrifice is available
2. Decide what percentage of your salary to sacrifice
3. Sign a formal agreement (your employer must provide this)
4. Your employer adjusts your contract and payroll
5. Your pension contribution increases automatically each month

You can usually opt out or change your sacrifice percentage once per year.

Try It in the Calculator

PayKeep's Salary Sacrifice tab shows you exactly how much tax and NI you'll save. Compare "before" and "after" side-by-side.