Salary sacrifice pension is almost always worth it. By reducing your gross salary and having your employer pay the equivalent directly into your pension, you save both income tax and National Insurance on the sacrificed amount. Your employer also saves on their NI contributions.
Here is how it works: instead of receiving £45,000 and contributing 5% (£2,250) to your pension from your net pay, you agree to reduce your salary to £42,750 and your employer pays £2,250 directly into your pension.
The savings on a £45,000 salary with 5% sacrifice are significant. You save £450 in income tax (20% of £2,250) and £180 in National Insurance (8% of £2,250), giving you a total saving of £630 per year. Your pension receives the same £2,250, but the actual cost to your take-home pay is only £1,620 instead of £2,250.
In other words, every £1 going into your pension only costs you 72p of take-home pay. That is an instant 28% return on your money before any investment growth.
For higher rate taxpayers earning over £50,270, the savings are even larger. On a £60,000 salary with 5% sacrifice (£3,000), you save £1,260 per year in tax and NI. Every £1 of pension costs only 58p of take-home pay — a 42% instant return.
Salary sacrifice also reduces your reported income, which can help you stay below thresholds for child benefit charges (£60,000), the personal allowance taper (£100,000), and student loan repayment thresholds.
The main downside is that it reduces your gross salary, which could affect mortgage applications and statutory pay calculations. However, for most people, the tax and NI savings far outweigh these concerns.
Use our salary sacrifice calculator to see your exact savings.