Salary sacrifice vs net pay vs relief at source
The contribution amount can be the same while take-home pay, National Insurance and how tax relief appears are different.
The three methods at a glance
| Method | Income Tax treatment | Employee NI | What reaches the pension |
|---|---|---|---|
| Salary sacrifice | Contractual cash salary is reduced before tax | Normally based on reduced cash pay | Employer contribution under scheme rules |
| Net pay arrangement | Employee contribution is deducted before Income Tax | Normally based on pay before the pension deduction | The employee contribution |
| Relief at source | Paid from after-tax pay; provider adds basic-rate relief | Normally unchanged | Your net payment plus provider-claimed relief |
The word “net” causes confusion: a net pay arrangement deducts a pension contribution before Income Tax is calculated, even though it usually comes after NI. Relief at source takes the employee’s payment from take-home pay and the pension provider claims basic-rate relief.
Salary sacrifice
You agree to reduce future contractual cash salary and the employer contributes under the arrangement. In a supported ordinary scenario, lower cash earnings reduce Income Tax and employee NI. Student-loan deductions may also fall because they generally follow the Class 1 NI earnings base.
Salary sacrifice can affect reference salary, statutory payments, life cover and lending evidence. It cannot reduce relevant pay below National Minimum Wage. Employer NI savings and whether any are added to the pension are employer-specific.
Net pay arrangement
The pension contribution is taken from gross pay before Income Tax but after NI. A taxpayer normally receives the correct Income Tax relief through payroll, including higher rates, without a separate claim. The contribution does not normally reduce NI-able or student-loan earnings.
Relief at source
You pay a net amount from pay after tax. The provider claims basic-rate relief and adds it to the pension. A higher- or additional-rate taxpayer may need to claim further relief, subject to the rules. Payroll NI and student-loan deductions are generally unaffected.
Limits and future changes
The pension annual allowance normally measures total contributions, including employer contributions, and can be reduced by tapering or the money purchase annual allowance. The government has also announced a change to the NI treatment of pension salary sacrifice from April 2029; that future rule is not part of a 2026/27 estimate.
Official sources
Model the current-year salary-sacrifice case.
Compare take-home, pension value and deductions avoided under the 2026/27 standard assumptions.