Guide · tax year 2026/27
Salary sacrifice or net pay pensions
The difference between salary sacrifice and net pay pensions for income tax, National Insurance and student loans.
If you pay into a workplace pension, the way your employer sets it up can change your take-home pay, even when you pay in exactly the same amount. The two most common methods for taking contributions from pay are salary sacrifice and a net pay arrangement. This guide explains the difference for income tax, National Insurance and student loans, using 2026/27 rules.
Salary sacrifice
With salary sacrifice, you agree to give up part of your salary, and your employer pays that amount into your pension instead. Because your salary is lower, you pay no income tax and no National Insurance on the part you give up (GOV.UK: salary sacrifice and the effects on PAYE).
A lower salary can have other effects. GOV.UK says salary sacrifice can affect the amount of statutory pay an employee receives, and some earnings-related benefits. So check with your employer before you agree to it.
Net pay arrangement
With a net pay arrangement, your employer takes your pension contribution out of your pay before deducting income tax (GOV.UK: pension tax relief). So you get tax relief straight away. But National Insurance is still worked out on your gross pay, before the contribution: there is no equivalent relief for National Insurance (HMRC manual NIM02365).
If your income is below the Personal Allowance, you pay no income tax, so you get no tax relief through your pay. From the 2024 to 2025 tax year, HMRC pays eligible people a top-up after the tax year ends instead (GOV.UK: relief relating to net pay arrangements).
Student loans
Student loan repayments are worked out on the same pay as National Insurance (GOV.UK: student loan guidance for employers). So salary sacrifice lowers your repayments, and a net pay arrangement does not.
A worked example
Take a salary of £40,000, a Plan 2 student loan, and a pension contribution of £2,000 a year:
| Item | Salary sacrifice | Net pay |
|---|---|---|
| Pay used for income tax | £38,000.00 | £38,000.00 |
| Pay used for NI and student loan | £38,000.00 | £40,000.00 |
| Income tax | £5,086.00 | £5,086.00 |
| National Insurance | £2,034.40 | £2,194.40 |
| Student loan | £775.35 | £955.35 |
| Take-home | £30,104.25 | £29,764.25 |
Income tax is the same either way. But with salary sacrifice, National Insurance and the student loan repayment are worked out on £38,000 instead of £40,000. Take-home pay is £340.00 a year higher, for the same pension contribution.
Relief at source
Some pensions use a third method, relief at source. You pay from your pay after tax, and your pension provider claims tax relief from the government at the basic rate and adds it to your pension (GOV.UK). Higher rate taxpayers can claim more through Self Assessment. Our calculators do not include relief at source.
Which do you have?
Your employer or pension provider can tell you which method your pension uses.
Pensions and the £100,000 trap
Both salary sacrifice and net pay reduce the income used for the Personal Allowance taper, which can make pension contributions very effective for people earning a little over £100,000. See the £100,000 tax trap.
A higher earner, no student loan
The difference is smaller for higher earners, because National Insurance above the upper earnings limit is charged at a lower rate. On £60,000, paying £3,000 a year into a pension:
- with salary sacrifice, take-home pay is £43,617.40;
- with net pay, take-home pay is £43,557.40;
- the difference is £60.00 a year, all from National Insurance.
Income tax relief is the same either way, because both methods take the contribution before income tax. What changes is National Insurance and, if you have one, your student loan repayment.
Above £100,000
Both methods reduce the income used for the Personal Allowance taper. On a salary of £110,000, a contribution of £10,000 restores the allowance to £12,570 with salary sacrifice and to £12,570 with net pay. Income tax is £27,432.00 either way. The only difference is National Insurance: take-home pay is £68,557.40 with salary sacrifice and £68,357.40 with net pay.
What stays the same
Whichever method your employer uses, the money going into your pension can be the same, and the income tax relief is the same. The amount your employer adds is usually set by your employer's scheme rather than by the method, so check your scheme's details. The difference this guide describes is only about how much of your pay you take home, through National Insurance and student loans. If you change jobs, your new employer may use a different method, so your take-home pay can change even if your contribution does not.
Common questions
Is salary sacrifice always better?
For take-home pay it usually leaves more in your pocket, because of the National Insurance saving. But a lower salary can affect statutory pay and some benefits, so it is worth checking with your employer.
Where can I compare the two?
Enter your pension in the salary calculator. It shows both methods side by side.
General information for the 2026/27 tax year, not financial or tax advice. We are not HMRC. Found a mistake? See our corrections policy.