This post is for employees weighing up a salary sacrifice scheme and for small employers setting one up. It compares salary sacrifice with the other ways of paying into a workplace pension, works through one salary on 2026/27 rates, and covers the limits: the minimum wage, statutory pay and the National Insurance cap announced for April 2029. For the definition and the payslip layout in brief, see the glossary entry linked below.
Salary sacrifice compared with other ways of paying in
There are three common ways an employee's pension contribution goes through payroll. Under a net pay arrangement the employer takes the contribution out of pay before Income Tax. Under relief at source it comes out of pay after tax, and the pension provider claims 20% basic rate relief and adds it to the pot. Under salary sacrifice the employee gives up that much pay by changing their contract, and the employer pays the same amount into the pension as an employer contribution.
Only salary sacrifice lowers the pay that National Insurance is charged on. HMRC's guidance is that no tax is charged on employer contributions to a registered pension scheme, and pension contributions are one of the benefits that keep their exemption when taken through salary sacrifice.
| No pension | Net pay arrangement | Relief at source | Salary sacrifice | |
|---|---|---|---|---|
| Pay for tax and NI | £2,800.00 | £2,660.00 for tax, £2,800.00 for NI | £2,800.00 | £2,660.00 |
| Taken from pay for the pension | — | £140.00 | £112.00 (provider adds £28) | — (employer pays £140) |
| Income Tax | £350.20 | £322.20 | £350.20 | £322.20 |
| Employee National Insurance | £140.16 | £140.16 | £140.16 | £128.96 |
| Take-home pay | £2,309.64 | £2,197.64 | £2,197.64 | £2,208.84 |
| Cost to take-home | — | £112.00 | £112.00 | £100.80 |
In every column £140 reaches the pension. The two non-sacrifice methods cost the employee £112, because tax relief at 20% covers the other £28. Salary sacrifice costs £100.80, saving another £11.20 a month: 8% employee National Insurance on the £140. Over a year that's £134.40.
The employer saves too. Employer National Insurance is 15% above the secondary threshold of £417 a month, so £140 less pay saves £21.00 a month, or £252 a year. Some employers add part of that saving to the employee's pension; nothing requires them to.
How it shows on the payslip
The sacrifice reduces pay, so it sits in the earnings part of the payslip, not with the deductions. Payroll either prints the lower contractual salary or shows the full salary with a negative line beneath it. For the example above:
| Line | Amount |
|---|---|
| Salary | £2,800.00 |
| Pension salary sacrifice | −£140.00 |
| Gross pay for tax and NI | £2,660.00 |
| PAYE tax | £322.20 |
| National Insurance | £128.96 |
| Net pay | £2,208.84 |
| Employer pension contribution (for information) | £140.00 plus any employer contribution of its own |
If you see your sacrifice listed as a deduction after tax and National Insurance, ask payroll to check it: that layout belongs to a relief at source contribution, not a sacrifice.
The minimum wage floor
HMRC's guidance says a salary sacrifice arrangement must not reduce an employee's cash earnings below National Minimum Wage rates, and employers need a procedure to cap the sacrifice so the minimum is kept.
From 1 April 2026 the National Living Wage is £12.71 an hour for workers aged 21 and over. For a 37.5-hour week that is £476.63 a week, or about £2,065.38 a month averaged over the year. An employee on that pattern paid £2,150 a month could sacrifice no more than about £84.62 before cash pay dropped below the minimum. Minimum wage is checked over each pay reference period, so in a month with extra hours the cap is lower.
Maternity pay, sick pay and mortgages
HMRC warns that a sacrifice can reduce statutory payments, or remove entitlement if average weekly earnings fall below the lower earnings limit, £129 a week in 2026/27.
Statutory Maternity Pay is 90% of average weekly earnings for the first six weeks, then £194.32 a week or 90% of earnings if lower. In the example, average weekly earnings fall from about £646.15 to £613.85, so the first six weeks pay £552.46 a week instead of £581.54: £174.48 less in total. The remaining 33 weeks are £194.32 either way. Any enhanced maternity pay follows the employer's own policy, so check how it treats a sacrifice before you sign up if a baby is planned.
Statutory Sick Pay is £123.25 a week or 80% of average weekly earnings, whichever is lower, so a sacrifice only lowers SSP for people with average weekly earnings under about £154 a week. HMRC's guidance doesn't cover mortgages: lenders set their own rules on whether they use the salary before or after a sacrifice, so ask the lender and keep a copy of the contract showing both figures.
The National Insurance change from April 2029
On 26 November 2025 HM Treasury and HMRC published a policy paper saying that from April 2029 the National Insurance exemption on pension contributions made through salary sacrifice will be capped at £2,000 a year. Employees and employers will pay National Insurance on the amount above £2,000. The contributions stay free of Income Tax within the usual limits, and ordinary employer pension contributions stay free of National Insurance. HMRC has said it will publish more guidance, including on employer reporting, before then.
The employee in the example sacrifices £1,680 a year, under the cap, so nothing changes for them. Someone sacrificing £300 a month, £3,600 a year, would have £1,600 above it. At today's rates that would cost them £128 a year in employee NI and their employer £240, though the rates for 2029/30 aren't set yet.
Making a payslip with a salary sacrifice line
If you run payroll yourself, record the sacrifice as a reduction to pay before tax and National Insurance, and keep the signed contract change on file. PayDocs works out PAYE income tax, National Insurance and supported deductions for 2026/27 pay dates. The payslip generator lets you add the sacrifice as its own earnings line so the employee can see their full salary and the amount given up.
This is general information about UK rules for the 2026/27 tax year, as published on GOV.UK on 13 October 2026. It is not tax, pensions or legal advice.
Questions
Is salary sacrifice worth it for a pension?
For most basic rate taxpayers it costs less take-home pay for the same pension contribution: in 2026/27 the extra saving is the 8% employee National Insurance, or 2% above £4,189 a month. Weigh it against any effect on statutory pay and mortgage applications.
Does salary sacrifice reduce my National Insurance?
Yes, because National Insurance is charged on the lower pay. From April 2029 the government plans to charge employee and employer NI on pension amounts sacrificed above £2,000 a year.
Can salary sacrifice take my pay below minimum wage?
No. HMRC says the arrangement must not reduce cash earnings below National Minimum Wage rates, so your employer has to cap the sacrifice in any pay period where it would.
Can I stop a salary sacrifice pension?
A sacrifice is a change to your contract, so stopping it means changing the contract again. HMRC's guidance says the contract must be clear about your cash and non-cash pay at any time; ask your employer how and when changes can be made.
Why is my gross pay lower than my salary?
With salary sacrifice the pay you're taxed on is your salary minus the sacrifice. That lower figure is also the one used for National Insurance and, often, for statutory pay.
Sources
- HMRC: Salary sacrifice and the effects on PAYE (updated 6 April 2026)
- HM Treasury and HMRC: Changes to salary sacrifice for pensions from April 2029 (published 26 November 2025)
- HMRC: Rates and thresholds for employers 2026 to 2027
- GOV.UK: Tax on your private pension, pension tax relief
- GOV.UK: Workplace pensions, what you, your employer and the government pay
- GOV.UK: National Minimum Wage and National Living Wage rates
Sources checked 19 October 2026. This article explains how pay documents work; it is not tax or legal advice.
