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Salary Sacrifice for Pension Contributions: A Tax-Efficient Option

Updated: Mar 21, 2023

Many employers are now offering salary sacrifice as a way to save for retirement, which can also save you money in other areas. Salary sacrifice is a permanent agreement between you and your employer to receive a lower salary in exchange for your employer making a non-cash contribution to your pension.


By reducing your gross salary, you will pay less income tax and national insurance contributions, and your employer will also save on their national insurance contributions. In some cases, you may be able to increase your pension contributions without affecting your take-home pay.


Benefits for Higher Rate Taxpayers

For those who pay higher taxes, there are additional benefits of using salary sacrifice. For example, reducing your salary to less than £50,000 can avoid the High Income Child Benefit Tax Charge, which applies to those with an income above £50,000. Additionally, sacrificing your salary can also help you avoid the reduction in your personal allowance if you earn more than £100,000 per year.


Considerations to Keep in Mind

While salary sacrifice offers many benefits, there are also drawbacks to consider. Once you have agreed to a salary sacrifice agreement, it cannot be easily changed, and your employer must agree to any alterations. In addition, reducing your salary may lower the level of life cover provided by your occupational pension.


It is also important to note that some occupational pension schemes require employer contributions to be returned if an employee leaves within two years, so you may not receive the salary you sacrificed if you leave your company soon after joining. Additionally, reducing your salary may also make it harder to get a mortgage under new lending rules introduced in 2014.


Potential Changes in the Future

There is a possibility that the tax treatment of pension contributions may change in future budgets, and this could impact new salary sacrifice agreements. The possibility of a flat rate regime raises concerns that salary sacrifice may be used to maintain higher rate tax relief. It is yet to be seen whether any changes will affect existing salary sacrifice schemes.


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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