UK pension guide · 2026/27
Pension salary sacrifice guide 2026/27
Salary sacrifice exchanges contractual cash pay for an employer pension contribution. This guide shows what changes on the payslip, where the savings come from, the legal and pension limits to check, and the cases where reducing pay can cost more than it saves.
Tax year: 6 April 2026 to 5 April 2027. Rules and figures last checked 25 August 2026. This is educational guidance, not a recommendation to change your pension or contract.
Payslip mechanics
The cash salary is changed before payroll runs
You and the employer agree to reduce your entitlement to future cash pay. The employer then pays the agreed amount into a registered pension scheme. HMRC treats a successful arrangement as an employer contribution rather than cash earnings, so PAYE and Class 1 National Insurance are calculated on the lower cash salary under the 2026/27 rules.
The employee NI saving is normally 8% on pay within the main band and 2% above the upper earnings limit. The employer can also save 15% above its secondary threshold. The employer decides whether any of that saving is added to your pension; do not assume a passback unless the scheme rules say so.
A valid arrangement needs
- 1. Agreement before the affected cash pay is earned.
- 2. A clear contractual change describing cash and pension entitlements.
- 3. Cash pay kept at or above the National Minimum Wage for each pay period.
- 4. Payroll and pension records that match the agreement.
Do not mix up the labels
Salary sacrifice, net pay and relief at source are different
All three can fund a pension, but only salary sacrifice changes contractual cash pay. That distinction determines whether employee National Insurance is saved.
| Method | Income Tax | Employee NI | How it is run |
|---|---|---|---|
| Pension salary sacrifice | Cash pay is reduced before PAYE; the employer contribution is not taxed as pay. | Saved on sacrificed pay under the 2026/27 rules. | Requires an employer scheme and a valid change to contractual cash pay. |
| Net pay arrangement | Employee contribution is deducted before Income Tax. | No NI saving: NI is still calculated on pay before the pension deduction. | Relief is normally automatic through payroll. |
| Relief at source | Paid from net pay; the provider adds basic-rate relief. | No NI saving. | Higher/additional-rate relief may need an HMRC claim. |
Illustrative arithmetic
Three worked salary-sacrifice examples
These annual examples use England, Wales or Northern Ireland rates, category A NI, no student loan, no other income and a defined-contribution pension. Actual payroll is period-based, so rounding and thresholds can differ by a few pounds.
| Scenario | Tax saved | Employee NI saved | Net pay given up | Pension added |
|---|---|---|---|---|
| £50,000 salary; £5,000 sacrificed | £1,000 | £400 | £3,600 | £5,000 |
| £110,000 salary; £10,000 sacrificed | £6,000 | £200 | £3,800 | £10,000 |
| £50,000 example + full employer NI passback | £1,000 | £400 | £3,600 | £5,750 |
Why the £110,000 example is different
Reducing adjusted net income to £100,000 restores £5,000 of Personal Allowance. The £10,000 sacrifice therefore saves £6,000 of Income Tax, not merely £4,000 at the headline higher rate. The effective Income Tax rate in this taper is 60%.
Why the passback is conditional
At 15%, a £5,000 sacrifice can save the employer £750 of NI. The third row assumes the employer adds every pound to the pension; many schemes pass back less or nothing.
Limits and trade-offs
Check the floor, the pension allowance and income-linked benefits
National Minimum Wage floor
Salary sacrifice cannot reduce cash earnings below the applicable hourly rate in a pay reference period. From 1 April 2026 the main rates are:
- 21 and over (National Living Wage): £12.71 per hour
- 18 to 20: £10.85 per hour
- Under 18: £8 per hour
- Apprentice (under 19, or in the first year): £8 per hour
Annual allowance
Total pension input normally has a £60,000 annual allowance. It can taper when threshold income exceeds £200,000 and adjusted income exceeds £260,000, down to a minimum of £10,000. Flexibly accessing a pension can also trigger the separate money purchase annual allowance.
Statutory pay and NI record
HMRC warns that lower average weekly earnings can reduce statutory payments. If earnings fall below the £6,708 annualised Lower Earnings Limit, an employee can lose statutory-payment entitlement and may affect contribution-based benefits. Payroll applies the actual weekly/monthly tests.
Notional salary is not guaranteed
Employers choose whether overtime, pay rises, life cover and their pension contribution use pre-sacrifice notional salary or reduced cash salary. Mortgage applications can also ask for either figure. Read the scheme rules before opting in.
Adjusted net income
A sacrifice can cross more than one threshold
£60,000
High Income Child Benefit Charge begins
£100,000
Personal Allowance taper and Tax-Free Childcare limit
£125,140
Personal Allowance is fully withdrawn
£260,000
Adjusted-income test for the pension allowance taper
Child Benefit is fully clawed back at £80,000 of individual adjusted net income, and Tax-Free Childcare is unavailable if either partner expects adjusted net income over £100,000. Other taxable income and pension arrangements affect these tests; gross salary alone is not the answer.
Before you opt in
Nine questions to ask payroll or HR
- 1What cash salary will appear in the revised contract and on payslips?
- 2Does the employer add any of its NI saving to the pension?
- 3Are employer contributions, overtime, bonuses and pay rises based on notional or reduced salary?
- 4How does payroll cap sacrifice against the minimum wage each pay period?
- 5Can the amount change after a major life event, and what notice is required?
- 6Could lower average weekly earnings reduce maternity, paternity, sick or other statutory pay?
- 7What total pension input has already used the annual allowance across every scheme?
- 8Has flexibly accessing a pension triggered the money purchase annual allowance?
- 9What salary evidence will the employer provide for a mortgage or other affordability check?
Already announced
The NI advantage changes from 6 April 2029
The government says only the first £2,000 of annual employee pension contributions made through salary sacrifice will remain exempt from employee and employer NI from 6 April 2029. Contributions above the cap can continue and remain exempt from Income Tax subject to the usual pension limits, but NI will apply to the excess. Employer pension contributions that are not employee sacrifice remain NI-free. HMRC says detailed operational guidance will follow.
Primary sources
Rules checked against current HMRC and GOV.UK guidance
- HMRC — Salary sacrifice for employers
Contract changes, minimum-wage floor, tax treatment, statutory-pay effects and notional-pay decisions.
- HMRC — Salary sacrifice pension practical considerations
Why a successful pension sacrifice is treated as an employer contribution rather than employee cash earnings.
- HMRC — Pension scheme rates
The £60,000 annual allowance, £200,000/£260,000 taper tests and £10,000 minimum for 2026/27.
- GOV.UK — Adjusted net income
The Personal Allowance taper and how qualifying pension contributions affect adjusted net income.
- GOV.UK — High Income Child Benefit Charge
The £60,000 start, £80,000 full-charge point and adjusted-net-income test.
- GOV.UK — Tax-Free Childcare eligibility
The £100,000 adjusted-net-income limit for each partner.
- HMRC — Pension salary sacrifice changes from April 2029
The future £2,000 annual cap on employee and employer NI relief, while Income Tax treatment remains.
Use the numbers, then read the scheme rules
The calculator compares payroll before and after sacrifice, including tax, employee and employer NI, student loans, Child Benefit and pension limits. It cannot know your employer's contract wording, passback policy, benefit definitions or pension provider rules.