Pension Contribution Method Comparison Calculator

Net pay arrangement: employer deducts contributions before calculating income tax (and NIC), so you get full tax relief immediately. Relief at source: you pay net contributions (80% of the gross amount), and the pension provider claims basic rate relief from HMRC. Salary sacrifice: your salary is formally reduced, and both income tax and NIC are saved on the sacrificed amount.

Salary sacrifice is usually most tax-efficient because contributions come from pre-tax, pre-NIC salary — saving both income tax and employee National Insurance. Relief at source only saves income tax. Net pay saves income tax and employee NIC (similar to salary sacrifice), but only for taxpayers, not non-taxpayers.

Under relief at source, non-taxpayers and basic-rate taxpayers receive 20% relief automatically. But under a net pay arrangement, contributions are made before tax — a basic-rate taxpayer in a net pay scheme saves the same as relief at source, but non-taxpayers get no relief (their income was already below the personal allowance). HMRC has been introducing a system to top up non-taxpayer contributions.

Salary sacrifice is most beneficial for people who earn just above NIC thresholds or who would lose the Personal Allowance at £100,000. Sacrificing salary to below £100,000 avoids the 60% effective marginal rate caused by the personal allowance taper.

Not usually — salary sacrifice for pension purposes does not reduce earnings for State Pension qualifying purposes. However, it may affect other contributory benefits and statutory pay calculations (maternity pay, sick pay) which are based on earnings. Employers should structure salary sacrifice agreements carefully.

Usually not — the method is determined by the employer's pension scheme rules. Most workplace pension schemes use either salary sacrifice or relief at source. You can check which method your employer uses by asking HR or checking your payslip.

Yes — 'salary exchange' is another term for salary sacrifice used by some pension providers and employers. The effect is the same: your contractual salary is reduced in exchange for the employer paying an increased pension contribution.

When an employer implements salary sacrifice, they save employer NIC (13.8%) on the sacrificed amount. Many employers pass all or part of this saving to the employee (increasing the pension contribution) or use it to fund other benefits. Check your employer's policy — some offer a 'NIC matching' enhancement to salary sacrifice contributions.