Salary Sacrifice & Pension Contributions: How to Pay Less Tax (UK)
Last updated: June 2025
Pension contributions are one of the most effective legal ways to reduce your tax bill in the UK. Through salary sacrifice in particular, you can cut both income tax and National Insurance while building retirement savings. Here is how it works.
How pension contributions reduce tax
When you contribute to a workplace pension, the contribution is taken from your gross salary before income tax is calculated. This means a higher-rate taxpayer effectively gets 40% relief — a £100 pension contribution costs them only £60 in take-home pay.
Salary sacrifice and National Insurance
With salary sacrifice, you formally give up part of your salary in exchange for an equivalent employer pension contribution. Because your gross salary is lower, you also pay less National Insurance — a saving you do not get with standard pension contributions. Many employers also pass on their own NI saving into your pension.
Escaping the £100k tax trap
Because pension contributions reduce your adjusted net income, they are a powerful tool for anyone earning just over £100,000. By contributing enough to bring income below £100,000, you reclaim your Personal Allowance and avoid the 60% effective marginal rate.
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