Why Salary Sacrifice Beats Relief at Source For Higher Earners

Find out why higher earners lose out with relief at source pensions, and how salary sacrifice could save £500+ a year in tax and NI.

15 October 2025

4 min read

Many higher earners unknowingly lose out on valuable pension tax relief each year – often because of how their pension is set up. This guide explains why relief at source pensions (like NEST) leave higher earners short, and how switching to a salary sacrifice setup with Penfold can save you hundreds every year – automatically.

TL;DR

If you earn over £50,000 and your pension is with a relief at source provider (like NEST), you could be missing out on £500+ a year in unclaimed tax relief.

Switching to a salary sacrifice pension with Penfold means you keep that money automatically – no forms, no HMRC admin, no waiting around.

How Relief at Source Costs Higher Earners Money

Putting money into a pension is one of the smartest financial moves you can make. But if your pension contributions are deducted after tax, as they are in most “relief at source” schemes, you’re probably leaving free money on the table. Here’s why:

Relief at source pensions only add 20% basic-rate tax relief automatically.
If you’re a higher-rate (40%) or additional-rate (45%) taxpayer, you have to claim the extra 20–25% yourself through a Self Assessment or HMRC form. You can find out how to reclaim this extra relief in our guide on How to Claim Higher-Rate Pension Tax Relief.
Millions of higher earners never do this – meaning hundreds or even thousands in lost relief every year.

An infographic titled “Pension Tax Relief Explained: Basic, Higher and Additional Rate Bonuses.” Basic Rate (20%) Taxpayer: £80 personal contribution + £20 automatic tax relief = £100 total pension contribution. Costs £80 for every £100 contributed. Higher Rate (40%) Taxpayer: £80 personal contribution + £20 automatic relief + £20 extra relief (claimed manually) = £100 total contribution. Costs £60 for every £100 contributed. Additional Rate (45%) Taxpayer: £80 personal contribution + £20 automatic relief + £25 extra relief (claimed manually) = £100 total contribution. Costs £55 for every £100 contributed. Key: Dark blue = pension contribution (personal or relief at source). Light blue = basic tax relief added automatically. Pink = extra tax relief that must be claimed manually. The image explains how pension tax relief increases for higher and additional rate taxpayers, reducing the real cost of contributing to a pension.

With salary sacrifice, your pension contribution comes out before tax and National Insurance. That means:

You get full tax relief instantly – no need to claim.
You save on National Insurance too (8% for employees, 15% for employers).
Everyone’s better off.

Real-World Example

For a £500 a month pension contribution:

The table shows that higher earners contribute the same £500 monthly under both schemes, but salary sacrifice through Penfold reduces the effective employee cost to about £340 and makes them £60–£70 a month better off, thanks to automatic tax relief and National Insurance savings.

Quick Win: A higher-rate earner contributing £500/month could save £60–£70 extra every month with salary sacrifice. That’s over £700 a year – automatically.

Salary Sacrifice vs Relief at Source: Why It Wins

In short, salary sacrifice gives you:
– Full tax relief automatically
– NI savings for you and your employer
– Simpler payroll and less admin
– Clearer, more professional benefit setup

1. Immediate Tax Efficiency

With relief at source, you have to reclaim higher-rate relief manually – and often months later. With salary sacrifice, it happens automatically through payroll. Instant, accurate and HMRC-compliant.

2. Double National Insurance Savings

Salary sacrifice reduces both employee and employer NI contributions:

Employees save 8% NI on the amount sacrificed.
Employers save 15% NI, which they can reinvest in your pension or keep as a business saving.

That’s why many Penfold employers choose to share the savings, boosting take-home value for staff at no extra cost. You can learn more about the latest NI rate changes in our National Insurance 2025 update.

3. Cleaner, Simpler Payroll

No chasing HMRC. No correcting tax codes. No explaining “relief at source” to confused employees. Salary sacrifice keeps everything inside payroll – so contributions and savings are instant and visible.

4. Feels More Employer-Backed

Salary sacrifice contributions appear right on the payslip. It’s clearer, more professional, and shows that the employer is helping staff save efficiently – a great boost for trust and perception.

5. A Cost-Neutral Win for Employers

Employers save 15% NI on every pound sacrificed. That can fund enhanced contributions, offset benefit costs, or be reinvested into wellbeing budgets – all while helping employees take home more pay.

Behavioural Truth: We’re Wired for Inaction

HMRC data suggests millions of higher-rate taxpayers never reclaim what they’re owed. It’s not laziness – it’s life. But every year you don’t claim, you’re losing money you’ve already earned. Salary sacrifice removes the friction entirely. You don’t have to remember to claim – the saving just happens.

If you’ve never claimed your pension tax relief before, you could be due a significant refund – find out how much you could reclaim here.