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Using Salary Sacrifice for Pension Contributions

Updated: Jul 20, 2022

What is salary sacrifice?

Salary sacrifice is an alternative way of saving into a pension. It’s particularly tax efficient and can save you money in other areas too. Not surprisingly many companies are now offering salary sacrifice schemes.

The idea is quite simple. You make a permanent agreement with your employer to take a lower salary. They then pay the same amount as a non-cash benefit into your pension.

Once you agree to sacrifice salary for pension contributions your gross pay before tax will go down. You’ll therefore pay less income tax and make fewer national insurance contributions. Your employer will also make a saving on their national insurance contributions and some companies share this saving with their employees.

Depending on your personal circumstances, you might be able to increase your pension contributions without changing your take home pay.

Additional benefits of using salary sacrifice for pension contributions

For higher rate tax payers, there are other benefits of using salary sacrifice for pension contributions that might not be evident at first sight.

  • If you have children, reducing your salary to less than £50,000 will allow you to avoid the High Income Child Benefit Tax Charge. This charge costs you pay one percent of the amount of Child Benefit you get for every £100 of your income above £50,000.

  • If you earn more than £100,000 a year, you can avoid the reduction in your personal allowance by sacrificing your salary in favour of receiving pension contributions.

There are a number of issues to consider

Salary sacrifice sounds very attractive. And it is. However, there are a number of drawbacks that you’d be wise to consider before entering any agreement.

  • Sacrifice agreements can’t be changed on a whim. You will need your employer to agree to any changes in your salary sacrifice agreement. In addition HMRC guidance warns that if an employee can swap between a non-cash benefit and cash earnings whenever they like, it’s not really salary sacrifice. That would place tax and NIC advantages accrued under a salary sacrifice arrangement at risk.

  • Reducing your salary may reduce the level of life cover benefit provided by your occupational pension.

  • Many occupational pension schemes stipulate that employer’s contributions are refunded to them if an employee leaves within two years. You may not be able to get the salary you sacrificed back if you leave your new company soon after joining.

  • Your application for a new mortgage might suffer. New mortgage rules introduced in 2014 have reduced the amount that lenders can advance to their customers. Reducing your salary might make it harder to get the mortgage you need.

The future of salary sacrifice

There is a lot of talk about whether the treatment of tax relief pension contributions is going to change at Budget 2016. If there is a move towards a flat rate regime, it’s likely that arrangements for new salary sacrifice agreements will also change. This is in order to avoid people using salary sacrifice to maintain their existing higher rate tax relief.

Whether any changes will apply to existing salary sacrifice schemes remains to be seen.


This article is for information only and should not be construed as advice or a recommendation. The investment strategies mentioned are examples only and may not be suitable for your particular: circumstances, tax position or objectives. Please seek independent financial advice before taking any action. No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.

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