How much can I salary sacrifice into my pension?

There is no set limit on salary sacrifice amounts, but pension contributions are subject to the Annual Allowance (£60,000 for 2024/25) and the Money Purchase Annual Allowance (£10,000) if you have already accessed flexible benefits. Your employer may also set their own limits.

Will salary sacrifice affect my mortgage application?

Yes, this is a key consideration. Because salary sacrifice reduces your gross salary, lenders will use your reduced salary when calculating how much you can borrow. This could affect your mortgage capacity. Some lenders may consider the sacrificed amount, but this is not guaranteed.

What happens to salary sacrifice if I am off sick or on maternity leave?

This depends on your employer's scheme rules. Some salary sacrifice arrangements continue during sick leave, while others may be suspended. During maternity, paternity, or adoption leave, your salary sacrifice may continue based on your reduced maternity pay rate, or it may be paused.

Can I stop or change my salary sacrifice arrangement?

Usually yes, but there are restrictions. Most salary sacrifice arrangements can only be changed at certain times, such as the start of a new tax year, or after a life event like marriage or having a child. Check your scheme rules for the specific terms.

Is salary sacrifice better than making regular pension contributions?

For most employees, yes. Because salary sacrifice reduces your gross salary, you and your employer both save on National Insurance. Regular contributions do not provide this NI benefit. However, salary sacrifice is not suitable for everyone, particularly those with low incomes or those claiming means-tested benefits.

What is the difference between salary sacrifice and salary exchange?

Salary sacrifice and salary exchange are essentially the same thing - both terms describe an arrangement where you exchange part of your salary for increased pension contributions. Salary exchange is sometimes used to describe the employer-side of the arrangement.

Salary Sacrifice Pension

Maximise Your Retirement Savings and Reduce Tax

What is Salary Sacrifice?

Salary sacrifice is an arrangement where you agree to reduce your gross salary in exchange for increased employer pension contributions or other benefits.

By sacrificing part of your salary, you pay less Income Tax and National Insurance because your taxable income is reduced. Your employer then uses the money they save to boost your pension contributions.

The Key Benefit

Both you and your employer benefit - you pay less tax and NI, and your pension gets a boost. It is a win-win arrangement.

How Salary Sacrifice Works

You Agree to Reduce Your Salary

You enter into a formal agreement with your employer to sacrifice a portion of your salary. This is usually set at a fixed amount or percentage.

Your Tax and NI Reduce

Because you are now paid a lower gross salary, you pay less Income Tax and National Insurance contributions on that reduced amount.

Your Employer Boosts Your Pension

Your employer uses the money they save on National Insurance to increase their contribution to your pension. They may pass on all or part of their savings.

You Receive Tax Relief Automatically

Because contributions come from your pre-tax salary, you receive pension tax relief automatically at your highest rate without needing to claim it.

Tax Benefits and National Insurance Savings

Income Tax Savings

If you are a basic rate payer, a £100 salary sacrifice saves £20 in Income Tax. Higher rate payers save £40, and additional rate payers save £45.

National Insurance Savings

You save 12% in Class 1 National Insurance on sacrificed salary (2% if you earn above the Upper Earnings Limit). Your employer also saves 13.8% in employer NI.

Example Savings

If you sacrifice £500 per month and are a basic rate payer, you could save around £140 per month in tax and NI combined, while your pension increases by £500.

Who Benefits Most?

Higher Earners

Those paying 40% or 45% Income Tax see the greatest benefit. A higher rate taxpayer sacrificing £10,000 could save around £4,000 in tax alone.

Basic Rate Taxpayers

Still worthwhile - you save 32% (20% tax + 12% NI) on sacrificed salary. Over a year, this can add up to significant extra pension contributions.

Consideration for Lower Earners

Salary sacrifice reduces your taxable income, which could affect entitlement to means-tested benefits like Universal Credit. If you are a low earner, check the impact before proceeding.

Risks and Considerations

Important Points to Consider

Salary sacrifice reduces your gross salary, which can affect mortgage applications and other loans
It can impact eligibility for means-tested benefits
There may be minimum salary thresholds below which sacrifice is not allowed
The arrangement is usually irreversible until the next tax year
Death before retirement - your reduced salary may affect life insurance payouts

Calculate Your Potential Savings

Use Delphina's retirement planner to see how salary sacrifice could boost your pension contributions.

Plan Your Retirement