Blog » Can salary sacrifice boost retirement savings?

Can salary sacrifice boost retirement savings?

November 6, 2023
The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.

If you are looking for ways to boost your retirement savings, you may have heard of salary sacrifice. In this article, we are going to explore the pros and cons of salary sacrifice and what benefits you can really expect to see.

First, we will explain the concept of salary sacrifice and how it can be used as a means of acquiring substantial non-cash benefits in a contract with your employer. Then, in the second part of this article, we will focus on whether it can be used to increase your pension, the pitfalls, and how it all really works.

What is salary sacrifice?

In effect, you will be giving up (sacrificing) a percentage of your income in exchange for a non-cash benefit. Sacrificing money to contribute to a non-cash benefit can be difficult to understand. It can be tough to visualise the benefit of a reduced gross monthly income. The types of benefits you are exchanging some of your salary for differ depending on your employer, but it might include a company car, childcare vouchers, a bus pass, or an increase in pension contributions.

As with any financial decision, it is important to consider your current and future needs, and decide what is best for you. Can you afford this? Will it enhance your lifestyle without damaging your monthly budget?

How it works

Salary sacrifice has to be agreed between employer and employee in a contract. This contract outlines how much of your income will go towards the non-cash benefit.

Your salary is automatically reduced by the agreed amount and put directly towards the benefit, instead of you making a contribution to the benefit separately. By doing it this way, in many cases, you can save tax as your taxable income is reduced.

Tax and National Insurance benefits

One of the main benefits of salary sacrifice is paying less tax. Due to the fact that you are reducing your income, you will be paying less tax and national insurance (NI). Often, after salary sacrifice your net income will be more because you are paying less in tax.

The employer normally has standard benefits on offer under salary sacrifice but some employers may offer what is termed as flexible benefit packages. These packages allow you to buy things which may be unique to your lifestyle. For instance, you may want to consider life insurance or critical illness cover through a flexible benefit package.

Before you decide

Before you decide to go with salary sacrifice be aware that in certain circumstances (because your annual income will be reduced) it may also affect your entitlement to other benefits supplied by your employer, such as maternity pay.

 It is important to check with your individual employer as to how a salary sacrifice contribution will impact you. It is also important to be mindful that you cannot reduce your income below the minimum wage.

Salary sacrifice and pensions

As shown above, if your annual income reduces, so does your tax and NI burden. As well as a reduction in tax, salary sacrifice can offer great benefits for your pension contributions.

In effect, even though contributions are being paid, you are not paying them directly. Through the salary sacrifice agreement, your employer is making payments directly into the pension fund from your salary, with the agreed amount of money. So, instead of you making your pension contribution after you have been paid, it is taken from your salary before you are paid.

Essentially, you are contributing the same amount into your pension whether the payment is made via a salary sacrifice or not. The biggest difference is, with salary sacrifice, you are paying less tax.

Therefore, you will go home with a little more in your pay packet due to the reduction in tax and NI.


Annual salary: £40,000

Amount you wish to contribute to your pension each year: £2,000

Salary Sacrifice: £2,000

Adjusted annual salary: £38,000 (Tax and NI will be reduced) and monthly take home pay will consequently increase.

With an occupational pension both the employer and the employee contribute. The total contribution is the same as if the employee were contributing directly from their own money, but they now have the luxury of paying less tax and NI.

As a result of an employee’s salary sacrifice, the employer will also pay less NI. Some employers decide to contribute some or all of this saving into the employee’s pension meaning that the overall pension contribution is higher.

Salary sacrifice: For and against

It is important to research before you decide to go down the salary sacrifice route. As stated above, you will need to check with your employer exactly how it may affect pay increases, bonuses, or work-related benefits.


  • You will pay less tax and NI
  • The flexible concept of salary sacrifice could allow you to easily access facilities or products which will enhance your lifestyle (i.e childcare vouchers, gym membership, etc.)
  • Your employer may pass on their NI savings to you to enhance your pension contributions.


  • To outside institutions, your salary will be rated as the total without the amount you are using for non-cash benefits (in the above example: £38,000 instead of £40,000). This may be detrimental – for instance if you need to prove a specific income in order to be accepted for a mortgage.
  • Life insurance may well be reduced as it is usually based on a multiple of your salary.
  • If an employee leaves an occupational pension within two years, they can receive a refund of contributions already made. However, through salary sacrifice, a refund would not be possible as contributions are made via your employer.


Salary sacrifice is a facility whereby employees can receive some of their income in the form of a non-cash benefit. It is administered through a contract agreed by both parties.

Benefits received may be personal benefits – such as commuting, pension contributions, gym membership, or childcare. Most employers tend to offer standard benefits but some will consider flexible benefit packages.

Either way, using salary sacrifice to pay for pension contributions is very popular. Even though contributions will be the same as paying through the normal channels, it could mean your tax and NI burden will be reduced.

Before using salary sacrifice make sure you understand how reducing your salary may impact upon other work benefits or natural bonuses and progression.

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