Every pension contribution attracts income tax relief, but only salary sacrifice also saves National Insurance. A basic rate taxpayer putting £1,750 into a pension pays £1,400 of it under relief at source or net pay and £1,260 under salary sacrifice, because the 8% employee National Insurance on the sacrificed salary is saved too. Above £50,270 the National Insurance saving falls to 2%, so the gap narrows: £4,800 costs a higher rate taxpayer £2,880 through relief at source and £2,784 through salary sacrifice. The method also decides whether a low earner gets any relief at all and whether the employer shares its own 15% National Insurance saving.
The three methods
| Method | How the contribution is made | Tax relief | National Insurance |
|---|---|---|---|
| Salary sacrifice | You give up salary and the employer pays the same amount into the pension | Automatic at your full marginal rate, because the salary is never taxed | Employee saves 8% or 2%; employer saves 15% and may pass some on |
| Net pay arrangement | Deducted from gross pay before tax is calculated | Automatic at your marginal rate, but nothing for earnings within the personal allowance | None |
| Relief at source | Deducted from pay after tax; the provider adds 20% | 20% added by the provider; higher and additional rate taxpayers claim the rest through Self Assessment or a tax code | None |
Most large employer schemes and public sector schemes use net pay; most personal pensions, SIPPs and many auto-enrolment master trusts use relief at source; salary sacrifice is an arrangement layered on top of either by agreement with the employer. The salary sacrifice versus relief calculator shows the true cost of a contribution under each method for your salary.
What £1 of pension costs
| Salary | Contribution | Cost under relief at source or net pay | Cost under salary sacrifice | Extra saving from sacrifice |
|---|---|---|---|---|
| £35,000 | £1,750, 5% | £1,400, 80p per £1 | £1,260, 72p per £1 | £140 |
| £35,000 | £3,500, 10% | £2,800, 80p per £1 | £2,520, 72p per £1 | £280 |
| £60,000 | £4,800, 8% | £2,880, 60p per £1 | £2,784, 58p per £1 | £96 |
| £60,000 | £6,000, 10% | £3,600, 60p per £1 | £3,480, 58p per £1 | £120 |
| £110,000 | £11,000, 10% | £4,600, 42p per £1 | £4,380, 40p per £1 | £220 |
The relief-at-source figures assume the higher rate taxpayer claims the extra 20% they are owed; many do not, and for them the cost is 80p per £1 until they do. The £110,000 example shows the effect of the personal allowance taper: a contribution that brings adjusted net income from £110,000 back to £100,000 restores £5,000 of allowance, so the effective relief is 60% and the pension costs about 40p per £1. Our guide to how much to pay into a pension covers contribution levels, and the pension tax relief calculator works the relief at any rate.
The employer’s 15%
Salary sacrifice saves the employer National Insurance at 15% on the amount sacrificed, £262.50 on a £1,750 contribution and £720 on £4,800. Some employers keep it, some pass all or part into the pension, and some split it. An employer that adds its full saving turns the £1,750 contribution into £2,012.50 at no extra cost to the employee, which is the single most valuable feature of sacrifice for a basic rate taxpayer. The salary sacrifice pension calculator shows the effect of any share of the employer saving being added.
The low earner trap
Under a net pay arrangement the contribution is deducted before tax, so an employee earning below the £12,570 personal allowance pays no tax and receives no relief: a £600 contribution costs the full £600. Under relief at source the same employee still gets 20% added by the provider, so £600 in the pension costs £480. Since 2024/25 HMRC has paid a top-up to low earners in net pay schemes to remove the difference, paid the following year, but the cash flow gap remains and the employee must be registered. Salary sacrifice has its own version of the trap: sacrificing below the National Insurance lower earnings limit of £129 a week or the National Living Wage is not permitted, and lower salary can reduce statutory maternity pay, mortgage borrowing capacity and life cover based on salary, as our salary sacrifice guide sets out.
Choosing
Where the employer offers salary sacrifice and the employee earns comfortably above the minimum wage, sacrifice is almost always the best method, and the question is only how much of the employer’s saving is shared. Where only relief at source is available, higher rate taxpayers must claim their extra relief or lose it: a £4,800 contribution leaves £960 unclaimed each year. Where the scheme is net pay, low earners should check they are receiving the HMRC top-up. The pension contribution calculator shows the take-home effect of any percentage under each method.
Common questions
What is the difference between salary sacrifice and relief at source? Salary sacrifice reduces your salary and the employer pays the pension, saving income tax and National Insurance automatically. Relief at source takes the contribution from taxed pay and the provider adds 20%, with higher rate taxpayers claiming the rest.
How much does salary sacrifice save? The employee National Insurance on the amount sacrificed: 8% up to £50,270 and 2% above, so £140 a year on a £1,750 contribution at the basic rate. The employer saves 15% and may add it to the pension.
Do I need to claim tax relief on my pension? Only under relief at source and only if you pay tax above the basic rate. Net pay and salary sacrifice give full relief automatically.
Why did I get no tax relief on my pension? You are probably in a net pay scheme earning below the personal allowance. HMRC now pays a top-up for this, but it arrives the following year.
Can salary sacrifice reduce my salary below minimum wage? No. The sacrifice cannot take pay below the National Minimum Wage, which limits how much lower earners can sacrifice.
Does salary sacrifice affect anything else? It can lower statutory maternity pay, mortgage affordability calculations and salary-linked benefits, and it cannot be used for contributions from salary within the personal allowance without care.
Information, not financial advice. Tax and National Insurance figures are the published 2026/27 rates on gov.uk: tax on your private pension contributions; worked figures are from the site’s calculator for an employee on a standard tax code. Scheme rules vary, so check with your employer or provider before acting on them.