Salary Sacrifice vs Personal Pension: Which Saves More Tax?
Both get you tax relief on pension contributions — but salary sacrifice also saves National Insurance. Here's exactly how much difference that makes.
The Quick Answer
Salary sacrifice can reduce the cost if your employer offers it and it suits your circumstances. You save both Income Tax and National Insurance, whereas a personal pension (SIPP) only saves Income Tax. Employee NI savings are usually 8% within the main band and 2% above the upper earnings limit, and can be zero below the primary threshold. Some employers also pass on their 15% employer NI saving, making sacrifice even more powerful.
At a Glance
| Feature | Salary Sacrifice | Personal Pension (SIPP) |
|---|---|---|
| Income Tax relief | Automatic (contribution taken pre-tax) | Relief at Source (20% auto, higher rates claimed via SA) |
| Employee NI saving | Yes — typically 8% / 2% in the applicable NI band | No — contributions from net pay |
| Employer NI saving | Yes — 15% (may be passed to you) | No |
| Flexibility | Locked to employer scheme | Full control — any provider, any fund |
| Mortgage impact | Reduces gross salary (lower borrowing) | No impact on gross salary |
| State benefits impact | May reduce statutory pay (SMP, SSP) | No impact |
| Annual limit | £60,000 (shared with all pension contributions) | £60,000 (shared) |
| Availability | Employer must offer it | Anyone can open a SIPP |
2026/27 standard employer NI: 15% above £5,000 a year. Actual payroll and employer exemptions can differ. HMRC employer rates. Reviewed 4 October 2026.
Worked Example: £5,000 Pension Contribution
An England, Wales or Northern Ireland basic-rate taxpayer earning £45,000 wants a £5,000 gross pension contribution (£4,000 net in a relief-at-source personal pension). Here's the cost difference:
| Detail | Salary Sacrifice | Personal Pension |
|---|---|---|
| Gross contribution to pension | £5,000 | £5,000 |
| Income Tax saved (20%) | £1,000 | £1,000 |
| Employee NI saved (8%) | £400 | £0 |
| Employer NI saving (standard rate: 15%) | £750* | £0 |
| Net cost to you | £3,600 | £4,000 |
| Income Tax + employee NI + potential employer saving | £2,150 | £1,000 |
*Assumes ordinary category A employer NI, earnings above the £5,000 secondary threshold before and after sacrifice, no unused Employment Allowance offset and no special employer exemption. The employer saving reaches your pension only if shared. Sacrifice cannot take pay below National Minimum Wage. The £3,600 personal cost excludes the separate employer saving.
Salary sacrifice reduces your personal cost by £400 for the same £5,000 gross pension contribution. If the employer shares all its saving, the pension receives another £750, bringing the gross pension funding to £5,750. That employer contribution is separate from your take-home saving.
When Salary Sacrifice Is Better
You want maximum NI savings
You save employee NI only on sacrificed earnings that would otherwise attract NI: normally 8% in the main band, 2% above it, or zero below the threshold.
Your employer shares their NI saving
Some employers add their 15% NI saving to your pension — effectively a bonus contribution.
You're a higher-rate taxpayer
You get full 40% tax relief automatically, plus the applicable employee NI saving (often 2% on higher-band earnings). No need to claim via Self Assessment.
You earn just above a tax threshold
Sacrifice can bring you below £50,270 (avoiding higher rate) or below £100,000 (preserving Personal Allowance).
When a Personal Pension Is Better
Your employer doesn't offer salary sacrifice
Many small employers don't. A SIPP gives you full control without employer involvement.
You're applying for a mortgage soon
Salary sacrifice reduces your gross salary, potentially reducing your maximum borrowing by 4-4.5x the sacrifice amount.
You want investment flexibility
SIPPs typically offer thousands of funds, ETFs, and individual shares. Workplace schemes may be limited.
You're near statutory pay thresholds
Salary sacrifice can reduce Statutory Maternity Pay, SSP, or redundancy pay if it takes you below key thresholds.
Run Your Own Numbers
Use our calculators to see the exact impact on your take-home pay and pension pot.
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