Everyone says it saves tax. Nobody says what it costs.
"Salary sacrifice is tax efficient" is true and useless. The number that actually decides whether to do it is this one: how much take-home pay do you give up to put a pound in the pension?That is what this tool leads on, because it is the number the decision turns on and almost nothing shows it.
On an ordinary £40,000 salary it is about 72p. Between £100,000 and £125,140 it is 38p.
The best deal in UK personal tax, and it only exists in one band
Between £100,000 and £125,140 the personal allowance is withdrawn at £1 for every £2 of income. That is what makes a pound of salary in that band cost 62p in England and 69.5p in Scotland, which is more than either country's top rate of tax.
Sacrifice runs the same arithmetic backwards. You give up a pound of gross and lose only 38p of take-home, because you buy the allowance back at exactly the rate you were losing it.
| £105,000, sacrificing £5,000 | |
|---|---|
| Into the pension | £5,000 |
| Take-home given up | £1,900 |
| Cost per £1 in the pot | 38p |
That is not a scheme and it is not aggressive. It is the taper read in the other direction, and it is available to anybody whose salary happens to sit in that band.
Your employer saves more than you might think, and can share it
Sacrifice reduces gross pay before anything sees it, so employer National Insurance at 15% falls too. On £5,000 sacrificed that is £750 a year the employer keeps.
A great many employers will add that saving to your pension if asked, because passing it on costs them nothing they had before. Almost nobody asks, and the reason is simple: it is very hard to ask for a figure you cannot name. The tool names it.
And it cuts the student loan, which net pay does not
Student loan repayment is 9% of gross pay above the threshold. A net pay pension contribution does not reduce it by a penny. Sacrifice reduces the gross itself, so the repayment falls with it. On a Plan 2 loan that is another 9p in the pound of relief that no other calculator counts and that never comes up when the two arrangements are compared.
The one hard floor
You cannot sacrifice below the National Minimum Wage. A sacrifice is a reduction in contractual pay, and pay is measured for minimum wage purposes after it. So an arrangement that takes somebody under the National Living Wage is not permitted however willing they are to do it.
This is the constraint that catches employers rolling a scheme out across an entire workforce rather than offering it to the people who ask for it. The tool works out the most that can be sacrificed at your hours and stops you above the line.
What it costs that a pay cut does not
Reduced gross pay is the whole mechanism, and it has consequences worth checking rather than assuming:
- Usually protected by agreement: mortgage affordability, death in service cover, and other benefits calculated on salary. Most schemes use a "notional" pre-sacrifice salary for these. Confirm it rather than hoping.
- Genuinely reduced: statutory payments, including statutory maternity pay, which is calculated on actual earnings. If a sacrifice is running through the qualifying period before a baby, it reduces the pay that follows, and that is a real cost at exactly the wrong moment.
None of that makes sacrifice a bad idea. It makes it a decision with a number attached, which is what this tool exists to put in front of you.
Common questions
What does salary sacrifice actually cost me?
That is the only question worth asking and almost nothing answers it. You give up gross pay, so what you actually lose is the take-home that pay would have produced. On an ordinary £40,000 salary a pound into the pension costs you about 72p of take-home. Between £100,000 and £125,140 the same pound costs 38p, because you buy back the personal allowance as you go. The tool leads on that number rather than on the tax saved.
Why is salary sacrifice so effective between £100,000 and £125,140?
Because the personal allowance is withdrawn at £1 for every £2 of income in that band, which makes every pound of salary there cost 62p in England and 69.5p in Scotland. Sacrifice runs that arithmetic backwards. Somebody on £105,000 sacrificing £5,000 puts the full £5,000 in the pension and gives up about £1,900 of take-home. It is not a scheme or a loophole, it is what the taper does when you read it in the other direction.
Does salary sacrifice save my employer money too?
Yes, and more than most people realise. Sacrifice reduces gross pay before anything sees it, so employer National Insurance at 15% falls with it. On £5,000 sacrificed that is £750 a year the employer simply keeps. A great many employers will add that saving to your pension if you ask, because it costs them nothing to do so, and almost nobody asks because almost nobody knows the number. The tool works it out so you can name it.
What is the difference between salary sacrifice and a net pay pension?
Net pay comes off your pay before income tax, so it saves tax at your marginal rate and saves no National Insurance, because NI is charged on your pay before the deduction. Salary sacrifice reduces the gross itself, so it saves both, and it saves the employer their 15% as well. Same contribution, same salary, materially different take-home.
Does salary sacrifice reduce my student loan repayment?
Yes. Student loan repayment is 9% of gross pay above the threshold, so a net pay pension contribution does not touch it at all. That is the part nobody counts. Sacrifice reduces the gross, so the repayment falls with it. On a Plan 2 loan that is another 9p in the pound of effective relief on top of the tax and National Insurance.
Is there a limit on how much I can sacrifice?
The hard one is the National Minimum Wage. A sacrifice is a reduction in contractual pay and pay is measured for minimum wage purposes after it, so an arrangement that takes somebody below the National Living Wage is not permitted however willing they are. That is the constraint that catches employers rolling a scheme out across a whole workforce rather than offering it to the people who ask. The annual allowance and its taper are separate limits worth checking at higher incomes.
What are the downsides of salary sacrifice?
Reduced gross pay is the point and it has consequences. Mortgage affordability, death in service cover and other salary-linked benefits are usually calculated on the pre-sacrifice figure by agreement, and that is worth confirming rather than assuming. Statutory payments including statutory maternity pay are based on the reduced figure, which matters a great deal if a sacrifice is running through the qualifying period before a baby.