Salary Sacrifice Pension Calculator

Salary sacrifice is a contractual arrangement where an employee gives up part of their cash pay in exchange for a non-cash benefit, in this case an employer pension contribution. Because the cash pay is reduced, both employee and employer National Insurance are worked out on the lower figure, generating savings for both sides. HMRC recognises salary sacrifice where the arrangement is documented in the employment contract and the post-sacrifice cash pay does not breach the National Living Wage.

The savings are the difference between the NI on the original salary and the NI on the reduced salary. Employee NI is 8% between £12,570 and £50,270 and 2% above £50,270 in 2026/27, so the saving depends on which band the sacrificed amount falls into. Employer NI is 15% on every pound above £5,000 with no upper cap, so the saving scales with the sacrifice. The table below shows typical figures on a £40,000 salary.

The employer saving is usually the larger of the two, because the 15% rate applies to every pound of the sacrifice above the £5,000 secondary threshold.

The post-sacrifice cash pay must stay above the National Living Wage (£12.71 an hour for workers aged 21+ from April 2026) for every hour worked. A sacrifice that pushes an hourly-paid worker below NLW is not legally valid and HMRC can treat the arrangement as ineffective. The pension annual allowance of £60,000 in 2026/27 also caps the total contributions (employee, employer and tax relief) for most people, with a tapered annual allowance for higher earners.

Statutory pay is calculated on the reduced salary. Statutory Maternity Pay, Statutory Sick Pay, statutory redundancy pay and the State Pension are all based on the post-sacrifice cash earnings, so a large sacrifice can reduce them materially. Mortgage and rental affordability checks also use the reduced salary, which can affect how much an employee can borrow. Weigh these against the NI saving before agreeing a high percentage.

The employer saves 15% NI on the sacrificed amount and can choose to pass some or all of it into the employee's pension as an extra employer contribution. This is the basis of the common "pension sacrifice" employer offer: the employee sacrifices a slice of pay, the employer pays that slice plus its NI saving into the pension, and the employee ends up with a larger pension pot for the same cash cost. The extra employer contribution is itself exempt from employer NI.

Enter the gross salary and annual pension contribution in pounds, select the employee tax band, and choose whether the employer adds its NI saving to the pension. The calculator shows reduced gross, income-tax and NI savings, net employee cost, total pension contribution and monthly saving. Check that post-sacrifice cash pay does not breach the National Living Wage.

Relief at source gives basic-rate tax relief through the pension provider and higher-rate taxpayers may claim extra relief. Salary sacrifice works differently: the employee gives up salary and the employer pays pension instead. That can reduce employee NI and employer NI as well as income tax. The best option depends on pension scheme type, tax band, employer policy and whether the employer shares its NI saving.

A useful way to explain salary sacrifice pension is to ask what happens to each £1 of salary. Without sacrifice, some of that £1 may be lost to tax and employee NI before a personal contribution is made. With sacrifice, the £1 can go straight into pension as employer contribution, and the employer may add some or all of its NI saving. That is why pension sacrifice can feel more powerful than an ordinary net pay contribution.

Do not sacrifice salary below minimum wage, and be careful before sacrificing during periods used to calculate SMP, SSP, redundancy pay, mortgage affordability or benefit entitlement. Employers should provide illustrations, obtain written consent and give employees a route to vary or stop sacrifice after lifestyle events.