Salary sacrifice (sometimes called salary exchange) is one of the simplest yet most powerful ways to boost pension contributions. But like all financial arrangements, it has pros and cons — and it’s important to understand how it works before deciding if it’s right for you.
What is Salary Sacrifice?
In simple terms, salary sacrifice is an agreement between you and your employer:
- You agree to give up part of your gross salary (before tax and National Insurance).
- Your employer pays that amount directly into your pension as an employer contribution.
This makes a big difference because it changes how National Insurance (NI) is applied:
- Under traditional contributions, you get tax relief on your pension payments, but you and your employer still pay NI on the full salary.
- Under salary sacrifice, your salary is reduced, so both you and your employer pay less NI.
Some employers keep their NI saving, but many pass it back into your pension, giving you more for the same cost.
How Does Salary Sacrifice Work in Practice?
Example 1: Employee on £30,000 salary
- Employee agrees to sacrifice £100 per month into their pension.
- Employer pays £100 directly into the pension.
- Employer NI saving (15% in 2025/26) = £15.
- If the employer passes this saving back, the total pension contribution becomes £115 per month.
Over a year, that’s £180 extra into the pension pot, at no extra cost to the employee.
Example 2: Employee on £50,000 salary (higher-rate taxpayer)
- Employee sacrifices £400 per month.
- Employer pays £400 into the pension.
- Employer NI saving (15%) = £60.
- If the saving is passed back, the total pension contribution becomes £460 per month.
For higher-rate taxpayers, this is especially efficient: you don’t have to claim back extra tax relief from HMRC — it’s all built into the sacrifice arrangement.
Over a year, that’s £720 of extra contributions on top of what you were already putting away.
Bonus Exchange: The Hidden Boost for Higher Earners
Salary sacrifice isn’t limited to monthly pension contributions. Many employers now also offer bonus exchange:
- Instead of taking your annual bonus as cash (and losing up to 40% in income tax and 2% NI if you’re a higher-rate taxpayer), you sacrifice some or all of your bonus into your pension.
- Because it goes in before tax and NI, the full gross bonus is invested in your pension.
- Your employer also saves 15% NI on the sacrificed amount, and if they pass that saving back, it’s an additional uplift.
Example: £10,000 bonus, higher-rate taxpayer
- Take it as cash: you might only see around £5,800 after tax and NI.
- Exchange it into your pension: the full £10,000 is invested, plus potentially an extra £1,500 if your employer passes on their NI saving.
That’s almost double the benefit compared to taking the bonus as cash.
The Advantages of Salary Sacrifice
- Bigger pension contributions – Employer NI savings can boost your pension each month.
- Tax efficiency – Contributions are taken before tax and NI, so you keep more of your money working for you.
- Simpler for higher-rate taxpayers – No need to reclaim higher-rate tax relief; it’s already factored in.
- Bonus exchange – A way to keep the full value of bonuses without losing big chunks to tax and NI.
- Employer benefits – Employers save on NI too, which they can pass back to staff or reinvest into the business.
The Disadvantages (and Things to Watch)
- Lower contractual salary – Your payslip shows a reduced salary, which could affect:
- Mortgage or loan applications.
- Salary-based benefits (e.g. life cover or redundancy).
- State benefits like Statutory Maternity Pay.
- Minimum wage restrictions – You can’t sacrifice your salary below the National Minimum or Living Wage.
- Annual Allowance still applies – All contributions (including those made via salary or bonus sacrifice) count towards the £60,000 annual allowance (or the tapered allowance if you earn over £260,000).
- Contract variation – Salary sacrifice requires a formal change to your employment contract.
- Not always flexible – Some employers set windows when you can change or stop contributions.
Why Employers Like It
Employers facing higher NI costs in 2025/26 can use salary sacrifice to manage payroll more efficiently. By offering this scheme and refunding their NI saving into staff pensions, they also deliver a strong employee benefit — helping with recruitment, retention, and morale.
Final Thoughts
Salary sacrifice and bonus exchange are two of the most tax-efficient ways to save for retirement in the UK today.
- For employees: you see more going into your pension without paying a penny more.
- For employers: you reduce NI costs and create a stronger benefits package for your team.
Like all financial strategies, it’s not perfect for everyone — but for many, it’s a win-win.
If you’d like to know how salary sacrifice or bonus exchange could work in your business or for your own retirement planning, get in touch and we’ll run the numbers for you.