Salary sacrifice vs relief at source
Both routes put the same money into your pension, but salary sacrifice also saves National Insurance. Enter a salary and contribution to see the real cost of each and the extra saving.
Why salary sacrifice usually wins
The two methods reach the same pension total by different paths. Relief at source takes your contribution from pay you have already been taxed on, then the provider claims the income tax back and adds it to your pot. Salary sacrifice instead cuts your gross salary before any tax is worked out, so the money never appears as taxable pay. The income tax result is the same, but only sacrifice removes the amount from your National Insurance as well.
That National Insurance saving is the whole difference. Employee National Insurance is charged at 8% on earnings between the primary threshold and the upper earnings limit, then 2% above. Relief at source cannot touch it, because the contribution is made after National Insurance has been taken. Salary sacrifice can, because the pay is gone before the National Insurance calculation. On the same contribution, sacrifice is cheaper by exactly that National Insurance.
Worked example
On a £45,000 salary, putting £5,000 into a pension costs £4,000 through relief at source, once the income tax relief is counted. The same £5,000 through salary sacrifice costs only £3,600, because you also save £400 of National Insurance. The same pension, with £400 less paid from your take-home pay. The gap is widest for basic-rate earners paying 8% National Insurance on the sacrificed slice.
Common questions
What is the difference between the two methods?
Salary sacrifice lowers your gross pay, so you avoid income tax and employee National Insurance on the amount that goes into your pension. Relief at source takes the contribution from taxed pay and adds income tax relief back, but it does nothing for National Insurance. Both put the same gross amount into the pension.
How much extra does salary sacrifice save?
For the same pension contribution it saves you the National Insurance as well. On the figures shown, that extra National Insurance saving is about £400 a year, making salary sacrifice cheaper for the same money in your pension.
Does relief at source ever win?
Rarely on cost alone, because it misses the National Insurance saving. But not every employer offers salary sacrifice, and sacrifice reduces your gross pay, which can affect entitlements linked to salary such as mortgage borrowing, statutory pay and some benefits. Relief at source keeps your headline salary intact.
Do higher-rate taxpayers get all their relief automatically?
With salary sacrifice, yes, because the money never gets taxed. With relief at source, only 20% is added automatically and a higher-rate taxpayer must claim the rest through Self Assessment. This comparison assumes the full income tax relief is received either way.