Salary sacrifice for pensions explained

Salary sacrifice for pensions explained

Explaining Salary Sacrifice For Pensions can be complicated. If you have ever heard about salary sacrifice for pensions, you will likely know this is a scheme that comes with numerous benefits. Yet how does it work exactly? What are the risks? What are the specific advantages gained from salary sacrifice? All of these questions – and more – are answered below.

Explaining Salary Sacrifice for pensions

Salary sacrifice for pensions is a government-backed scheme that needs to be agreed upon by both the employer and employee. The employer has to offer the scheme as part of their contracts, while the employee has to agree to part with a portion of their salary – hence the “salary sacrifice” part of the equation.

For pensions, this sacrifice is turned into pension contributions. Along with adding more to their pension pot each month, it also results in tax savings. An employee doesn’t owe as much tax, which results in them getting to keep more of what they’ve earnt.

Benefits of Salary Sacrifice for pensions

There are plenty of employee benefits gained when using salary sacrifice for pensions. As mentioned in the previous section, it helps you with owing less tax. This is particularly advantageous if it pushes you down into a lower tax band.

As well as lowering your tax contributions, it also reduces your National Insurance contributions (NICs). You have to pay less NICs, which again leads to more money ultimately ending up in your pocket. An added positive of this is that contributions are also lowered for your employer, giving them extra incentive to offer salary sacrifice.

Another positive of salary sacrifice for pensions is that more money ends up in your pension pot. Larger contributions to your pension – especially when matched by your employer – ensure your retirement savings are much healthier and bountiful.

Potential risks

Although it is easy to be blinded by the workplace benefits of utilising salary sacrifice for pensions, there are potential risks with this scheme.

The most notable risk is that, after sacrificing a portion of your salary, you end up with less take-home pay every month. If you are already finding it a challenge to cover your essential monthly costs each month – think mortgage payments and utility bills – lowering your salary might not be the wisest decision.

Another possible risk is tied to the fact that schemes will usually tie you into agreements that last for a number of years. This means if your situation changes and you want to stop making pension contributions immediately, this could result in you having to pay a penalty.

Important things to consider

With numerous advantages and potential risks, there is plenty to consider before you decide to opt for salary sacrifice for pensions.

The tax benefits of sacrificing a portion of your salary cannot be overlooked. Not only are you paying less tax in general, but it also leads to less money going towards your National Insurance contributions. Add in how your employee can match contributions to your pension pot, and you can end up with some healthy retirement savings.

However, you may have to think about how a salary sacrifice can impact your current situation. This could decide how much you decide to sacrifice or, if you cannot afford to lower your monthly salary, if it’s even a viable option right now.


If you want to boost your pension pot and pay less tax in the process, there are few schemes on the same level as salary sacrifice. This is an excellent route to take if offered by your employer, and it’s a scheme you shouldn’t overlook if available. Learn more about the iSIPP Salary Sacrifice scheme here.




The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.

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