Understanding Salary Sacrifice Pension Tax Relief

  •  By
  •  Frankie Dewar

When it comes to planning for a comfortable retirement, maximising savings potential is crucial. One effective way to achieve this is with salary sacrifice pension tax relief. By understanding this strategy and how it works, pension savers can enjoy reduced taxes while bolstering their retirement pot. In this article, we'll explore:

  • The concept of salary sacrifice.
  • Pensions and salary sacrifice tax relief benefits.
  • How salary sacrifice can help savers reach their retirement goals.

What is salary sacrifice?

Salary sacrifice is a voluntary agreement between an employee and their employer. The employee agrees to reduce their pre-tax salary in exchange for non-cash benefits.

Common benefits include childcare vouchers, bike-to-work schemes, and workplace pension contributions. By opting for a salary sacrifice arrangement, employees can reduce their taxable income and save on taxes.

Read more in our What is salary sacrifice article to see whether you're missing out.

Salary sacrifice pension tax relief: The basics

One of the most popular salary sacrifice schemes involves increasing pension contributions.

When an employee agrees to sacrifice a portion of your salary towards your pension, they're effectively redirecting their pre-tax income. This lowers their overall taxable income and results in tax savings. The tax savings come from lower income tax and National Insurance contributions (NICs).

The employer also saves on National Insurance contributions. They may choose to contribute a part or the entire amount saved to employees pensions.

Find out more in our Salary sacrifice for pensions explained article.

How does salary sacrifice pension tax relief work?

To better understand how salary sacrifice pension tax relief works, consider the following example:

  • Before salary sacrifice an employee earns £40,000 per year and contributes 5% of their salary (£2,000) to their pension. However National Insurance is charged on their full £40,000 salary.
  • Now, let's say the employee agrees to a salary sacrifice of £2,000. This brings their salary down to £38,000. As a result, the employee and employer pays less National Insurance.
  • The employer then contributes the £2,000 sacrificed directly into the employee's pension.
  • The employer can also choose to pay the National Insurance savings (for example £200) to the employee's pension. This effectively increases the employee's pension pot by £2,200 and allows them to grow their pension faster while enjoying tax savings.

Advantages of salary sacrifice pension tax relief

  1. Lower Employee National Insurance contributions. By reducing taxable income, salary sacrifice pension tax relief helps employees save on National Insurance contributions. This leaves more money in their pocket which can be used for other financial goals.
  2. Greater Pension Contributions. As contributions are taken from an employee's pre-tax salary they can choose to contribute the savings to their pension. This means they don't have to reduce take-home pay while increasing monthly pension contributions. This accelerates pension growth and could improve financial security in retirement.
  3. Employer National Insurance Savings. When participating in a salary sacrifice pension scheme, employers also benefit from reduced National Insurance contributions. They may choose to contribute these savings to employees pensions, further increasing their pension pots.
  4. Flexibility. Salary sacrifice pension schemes are typically flexible, allowing you to adjust your contributions as your financial circumstances change. This enables you to optimise your retirement planning based on your evolving needs and goals.


Claiming tax relief with a salary sacrifice pension is an effective strategy to both maximise retirement savings and reduce tax. By understanding how it works and the benefits it offers, its easier to make informed financial decisions.

Employees interested in salary sacrifice pension schemes should speak to their employer. By implementing salary sacrifice they can start growing their pension pot and save on tax.

For employers

Use our salary sacrifice pension calculator. You'll see how much businesses and employees can save by switching to a more tax efficient pension scheme.

Penfold's tech-first workplace pension makes it easy for employers to set up or convert to a salary sacrifice pension.

Speak to a Penfold salary sacrifice expert. A member of our team will explain how to save money with tax efficient pension contributions at your business.

Frankie Dewar

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