What is a salary sacrifice pension? 

6 min read

A salary sacrifice pension is where you agree with your employer to give up part of your salary so you can get extra employer pension contributions. It’s sometimes called salary exchange.

How does it work?

First, your employer reduces your salary by an agreed amount. And then pays that same amount – plus your company’s normal employer contribution – into your pension each month.

The main benefit of a salary sacrifice pension is that it reduces your employer’s and your National Insurance contributions. This is on top of the normal income tax relief you receive on your pension contributions. 

As both employer and employee National Insurance contributions are calculated based on this lower salary, you both pay less National Insurance (it’s a win-win!). Income tax is also calculated based on this lower salary, which means you’ll also pay less income tax.

Some employers also share their National Insurance savings with their employees. This means for the same amount being paid into your pension, your take-home pay is likely to be slightly higher.

If you do choose Salary Sacrifice for your pension, it’s worth knowing: 

  • you can’t contribute so much that it reduces your salary to less than the minimum wage
  • if you don’t earn enough to pay National Insurance, you might not benefit from Salary Sacrifice

Are there any downsides to salary sacrifice pensions?

Because it does reduce your salary, there are some things to consider:

– any employer benefits based on your salary, for example Life Insurance or Critical Illness cover, could be based on the lower salary. You should check with your employer if you aren’t sure. 

–  if you’re applying for a mortgage or loan, the lower salary could reduce the amount you can borrow.

– it might impact your entitlement to certain State benefits, like Statutory Maternity Pay.

Before opting for Salary Sacrifice, it’s best to make sure you check that it makes sense for you and your individual situation. 

Can I sacrifice my bonus into my pension too?

Some employers do allow you to ‘sacrifice’ any bonuses they give into your pension. This is called ‘bonus sacrifice’ and means that your bonus is paid into your pension instead of being paid into your bank account together with your salary. You can also get an additional contribution from your employer to match this. 

The biggest benefit of putting your bonus money straight into your pension as an employer contribution is that you won’t pay National Insurance or income tax on it. Because of this, the whole amount is added to your retirement pot, which means more money for ‘future you’. 

Not all employers offer this, but it’s worth asking your employer if they do.