Do you understand what salary sacrifice is when it comes to your pensions? A recent survey revealed that out of 1,000 people across the UK, only 27% knew what this term truly meant [1].
That’s a staggering knowledge gap considering the potential tax savings and pension perks to benefit from with this technique.
Whether you're planning for retirement or just looking to make more of your money, understanding salary sacrifice could be a game-changer for your financial future.
Let’s take a look at the benefits of salary sacrifice pensions.
- What is salary sacrifice?
- How does salary sacrifice work?
- Benefits of salary sacrifice
- Disadvantages of salary sacrifice pensions
- Can I sacrifice my bonus?
- Can I salary sacrifice into a SIPP?
- Tax-efficient alternatives
- Final thoughts
What is salary sacrifice?
A salary sacrifice scheme is a government-approved method that can be a tax-efficient way to enhance your benefits package without reducing your overall reward.
How it works is that an employee will give up a portion of their salary in return for a non-cash benefit from their employer. This could be a higher contribution into their pension, a company car, inclusion in a cycle to work scheme, or other perks like health insurance.
Pension salary sacrifice is one of the most popular uses of this scheme. More on this and how it works can be found in the next section.
How does salary sacrifice work?
Salary sacrifice for pensions might sound complicated, but it’s fairly straightforward once you break it down. Here’s how it typically works:
- You agree to give up part of your salary or bonus — this is a formal change to your employment contract, so it’s not generally something you can opt in and out of casually.
- Your employer pays that amount into your pension instead of you managing it directly with your own money from your take-home pay.
- You and your employer pay less National Insurance – and potentially Income Tax too – because your gross salary is lower.
- Your employer might top up your pension even further by passing on their own NI savings onto you.
Since the pension contributions are classed as employer contributions, you won’t pay tax on them (up to your annual allowance, which is usually £60,000 or your total salary — whichever is lowest) [2].
But it’s not a one-size-fits-all solution. A lower salary on paper can affect things like mortgage applications, maternity pay, or certain state benefits you could receive — especially for lower earners.
So, before making any changes, check your employer’s policy and speak to HR or payroll.
It's also worth considering the impact on your overall financial planning and making sure you’re still earning above the National Minimum Wage after the reduction.
Benefits of salary sacrifice
For many, a salary sacrifice pension seems like a win-win.
It can allow you to boost your long-term savings while potentially leaving more in your pocket each month.
Here’s why they’re worth considering:
- Lower National Insurance contributions — by reducing your gross salary, you and your employer both pay less in NI, which can add up to real savings
- Potentially more take-home pay — even though you’re putting more into your pension, your reduced tax and NI bill could mean your net pay may go up.
- Tax-efficient pension growth — all contributions made through salary sacrifice count as employer contributions, which aren’t taxed.
- Potential pension top-ups from your employer — some employers may pass on their NI savings by boosting your pension even further.
- Faster pension growth — more money going in, from both you and potentially your employer, means your pot could grow quicker through compounding (but remember pension investments can go down, as well as up over time).
For employers, salary sacrifice can cut NI costs, help attract and retain talent, and enhance their overall benefits package — all without increasing payroll spend.
Just be sure to check how it affects things like borrowing potential (when it comes to buying a property), your benefits entitlements, and eligibility for insurance cover. You may want to speak to your employer or a financial adviser before making the switch.
Disadvantages of salary sacrifice pensions
While salary sacrifice pensions can be a savvy way to boost your retirement savings and reduce your tax bill, they’re not without drawbacks.
Here’s some things to consider before deciding what’s right for you:
- Reduced borrowing power — mortgage lenders often base decisions on your reported salary. A lower income on paper could limit how much you’re able to borrow.
- Lower statutory benefits — if your salary falls below key thresholds, your entitlement to benefits like Statutory Maternity Pay, Statutory Sick Pay, or the State Pension could be reduced or even lost altogether (which is why it's important to check how a reduction in cash earnings may impact your NI contributions).
- Potential impact on life cover — some workplace life insurance policies are based on your salary. A lower reported salary could mean lower cover.
- Locked-in pension contributions — once the money’s in your pension, it’s usually not accessible until at least age 55 (rising to 57 from 6th April 2028)[3].
- Employer rules vary — not all employers pass on their NI savings, so it’s worth checking how generous the scheme is with your employer first.
- Not suitable for lower earners — if salary sacrifice would push your income below the National Minimum Wage, you sadly won’t be eligible to take part.
In short, it’s a smart option for many, but always weigh the long-term perks against the short-term trade-offs.
Can I sacrifice my bonus?
Yes, you can sacrifice your bonus — if your pension provider* and employer allows it.
Known as “bonus sacrifice”, this works just like salary sacrifice. However, instead of receiving your bonus as cash, you ask your employer to pay some or all of it directly into your pension.
The main perk? You’ll usually avoid paying Income Tax and NI on the amount you sacrifice. This can be especially valuable in months when a bonus pushes you into a higher tax or NI bracket.
By sacrificing it, you keep more of your money and boost your pension pot at the same time.
One thing to watch?: Keep an eye on your pension annual allowance. If your total contributions (including from your employer and any government top-ups) go over £60,000 (or your total earnings, if this lower) in a single tax year, you could face a tax charge.
Can I salary sacrifice into a SIPP?
In short, maybe. But it will depend on the provider and your employer.
A SIPP (Self-Invested Personal Pension) is, as the name suggests, a personal pension that gives you control over how your retirement money is invested. It can exist in place of a workplace pension, or you can open a SIPP in addition to your workplace one in order to increase your overall retirement pot.
Whether you can use salary sacrifice for payments into a SIPP depends on two things:
- If your SIPP provider allows it*;
- And if your employer agrees to make contributions on your behalf.
Some providers do accept employer contributions via salary sacrifice, but many do not. *At Wealthify, contributions must come directly from your own bank account, so salary sacrifice isn’t possible.
Tax-efficient alternatives
If, on reflection, a salary sacrifice pension doesn’t seem like the right fit for you, that doesn’t mean there aren’t other ways to save and grow your money tax-efficiently.
One popular alternative is an ISA (Individual Savings Account) — which is another type of “tax wrapper”. This lets you save or invest up to £20,000 per year without paying tax on interest, dividends, or capital gains.
There are a few different types of ISA available, and at Wealthify we offer the following:
Stocks and Shares ISA
A Stocks and Shares ISA lets you invest your money in shares, bonds and other assets. Instead of interest, your money grows through investment returns like dividends and capital gains, which are all free from tax while in the ISA wrapper.
At Wealthify, we manage these investments for you, while also allowing you to pick your investment style.
With investing your capital is at risk, and you could get back less than you put in.
Cash ISA
A Cash ISA is a savings account which allows you to build up your savings, without paying tax on any interest you make.
Junior ISA
A Junior ISA (JISA) is for children under 18, and is opened for them by their parent or legal guardian. Any money paid in will belong to the child, and they’ll be able to access it on their 18th birthday.
At Wealthify, we offer a Stocks and Shares Junior ISA to help build a nest egg for your child’s future. Any contributions into the account will be invested to give it the chance to grow over time, with no tax needing to be paid on any gains they make.
With investing, your capital is at risk. Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Final thoughts
Whatever route you take, building a tax-efficient future doesn’t have to be complicated. Whether you're making the most of ISAs or planning further ahead with a pension, there are smart ways to grow your money while keeping more of it.
Want to explore how a Self-Invested Personal Pension could fit into your retirement plans?
With investing, your capital is at risk. Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
References
- Research conducted by Wealthify amongst 1,000 UK adults on their understanding of pensions. June 2025.
- Money Helper | The Annual Allowance
- The government UK | Personal and workplace pensions
