When planning for retirement or managing payroll deductions, UK employees often ask: Which method offers more tax efficiency — salary sacrifice or net pay pension contributions? This guide compares both options with real examples, tax implications, and how your income level affects the best choice.
What’s the Difference Between Salary Sacrifice and Net Pay?
What is Salary Sacrifice?
Salary sacrifice is an arrangement where you agree to reduce your gross salary in exchange for non-cash benefits — most commonly pension contributions. Your employer redirects the sacrificed amount directly into your pension.
- Example: You earn £40,000. You sacrifice £4,000 into your pension. Your gross salary becomes £36,000, reducing your taxable income and National Insurance contributions.
What is the Net Pay Method?
The net pay method deducts your pension contributions from your salary before tax, but after National Insurance is calculated. You receive full tax relief, but you still pay NI on your full gross salary.
- Example: You earn £40,000. Your payslip shows £4,000 deducted as a net pay contribution. You only save on income tax — not NI.
Key Structural Differences
| Feature | Salary Sacrifice | Net Pay |
| Reduces Gross Salary | ✅ | ❌ |
| Saves National Insurance | ✅ | ❌ |
| Requires Employer Setup | ✅ | ❌ |
| Simple to Administer | ❌ | ✅ |
Tax and National Insurance Savings Compared
How Salary Sacrifice Affects Tax and NI
By lowering your gross salary, salary sacrifice reduces both income tax and National Insurance (NI). This can mean significant savings for both the employee and the employer.
Learn more about the top salary sacrifice benefits to see how this strategy can improve your overall financial wellbeing.
- Example: A £4,000 pension contribution can save ~£480 in employee NI (12%) and ~£800 in income tax (20%) for a basic-rate taxpayer.
- How Net Pay Contributions Affect Tax
The net pay method still offers income tax relief, but NI contributions remain unchanged. It’s tax-efficient, but not as efficient as salary sacrifice when National Insurance is considered.
Relief at Source vs Net Pay
Some private pensions offer relief at source, where you contribute net of tax, and HMRC tops up 20%. Net pay, by contrast, gives full tax relief through payroll, useful for higher earners.
Which Option Is Better Based on Your Income Bracket?
Basic-Rate Taxpayers (£12,571–£50,270)
If you earn within the basic tax band, salary sacrifice usually provides more savings by reducing both income tax and NI.
- Case Example: £30,000 salary, £3,000 pension
- Salary Sacrifice saves ~£960 (tax + NI)
- Net Pay saves ~£600 (tax only)
- Salary Sacrifice saves ~£960 (tax + NI)
Higher-Rate Taxpayers (£50,271+)
Higher earners benefit even more from salary sacrifice due to 40% income tax rates and higher NI thresholds.
For a detailed breakdown of how it works, check out our complete guide on salary sacrifice for pensions.
- Case Example: £60,000 salary, £6,000 pension
- Salary Sacrifice saves over £2,160
- Net Pay saves around £1,800
- Salary Sacrifice saves over £2,160
Low-Income Workers
Those near minimum wage may be ineligible for salary sacrifice due to National Minimum Wage (NMW) protections. Employers must ensure post-sacrifice pay doesn’t fall below legal limits.
HMRC Guidance and Employer Setup Requirements
HMRC’s View on Salary Sacrifice
HMRC recognises salary sacrifice as a legitimate method if the arrangement:
- Alters your employment contract
- Is implemented before salary is earned
- Is not reverted frequently
Employer Considerations
Salary sacrifice must be supported by the employer and structured through payroll. Not all pension schemes support it.
- Net pay is often simpler and doesn’t require contract changes.
- Public sector workers like NHS employees may be subject to additional pension rules.
Pros and Cons of Each Contribution Method
| Feature | Salary Sacrifice | Net Pay |
| Reduces Income Tax | ✅ | ✅ |
| Reduces National Insurance | ✅ | ❌ |
| Employer Setup Needed | ✅ | ❌ |
| Simplicity | ❌ | ✅ |
| Mortgage Application Impact | Possible | None |
| Auto-Enrolment Friendly | ❌ (NMW risk) | ✅ |
Real-World Example Calculations
Example 1: £30,000 Salary – Basic-Rate Taxpayer
- Salary Sacrifice:
- Gross Salary After Sacrifice: £27,000
- Tax Savings: £600
- NI Savings: £360
- Total Saved: £960
- Gross Salary After Sacrifice: £27,000
- Net Pay Method:
- No change in gross salary
- Tax Savings: £600
- Total Saved: £600
- No change in gross salary
Example 2: £60,000 Salary – Higher-Rate Taxpayer
- Salary Sacrifice:
- Gross Salary After Sacrifice: £54,000
- Tax Savings: £2,400
- NI Savings: £720
- Total Saved: £3,120
- Gross Salary After Sacrifice: £54,000
- Net Pay Method:
- Tax Savings: £2,400
- NI Savings: £0
- Total Saved: £2,400
- Tax Savings: £2,400
Frequently Asked Questions
Can I switch from net pay to salary sacrifice?
Yes, if your employer offers both options and you meet eligibility rules (e.g., NMW thresholds).
Does salary sacrifice affect mortgage affordability?
Yes — since your gross salary is lower, lenders might offer smaller loans.
Can I use both methods?
No. Pension schemes usually support one contribution type per setup.
Does salary sacrifice affect student loans or maternity pay?
Yes — since these are calculated on gross salary, both may reduce.
Use Our Salary Sacrifice Calculator to Compare Your Options
Want to know exactly how much you’ll save?
✅ Use our free Salary Sacrifice Calculator to:
- Input your salary and pension contribution
- Compare take-home pay under both methods
- See real-time tax and NI savings
- Adjust figures to fit your personal scenario
This tool is built to help both basic- and higher-rate taxpayers make informed decisions.