Salary sacrifice, net pay or relief at source: how your pension affects your pay
All three ways of paying into a workplace pension give you tax relief, but they take the money at different points. That changes what shows on your payslip, and sometimes how much you keep.
The three types
Net pay arrangement
Your contribution comes off your pay before income tax is worked out, so you get tax relief straight away at your highest rate. It's taken after National Insurance, so there's no NI saving.
Salary sacrifice
You agree to a lower salary, and your employer pays the difference into your pension. Because your pay is lower, you save income tax and National Insurance. Student loan repayments fall too. Your employer also saves 15% NI, and some employers add that to your pension.
Relief at source
Your contribution is taken from your pay after tax. Your pension provider then claims 20% basic-rate relief from HMRC and adds it to your pension, so every £80 you pay becomes £100. Higher and additional-rate taxpayers have to claim the rest themselves, through Self Assessment or by asking HMRC to change their tax code. Personal pensions and SIPPs work the same way.
Side by side
These examples cover 2026/27 in England, with a 5% contribution and 3% from the employer. The same £3,200 goes into the pension each year in every case.
£40,000 salary
| Net pay | Salary sacrifice | Relief at source | |
|---|---|---|---|
| Income tax | £5,086.00 | £5,086.00 | £5,486.00 |
| National Insurance | £2,194.40 | £2,034.40 | £2,194.40 |
| Your contribution from pay | £2,000.00 | £2,000.00 | £1,600.00 |
| Take-home pay | £30,719.60 | £30,879.60 | £30,719.60 |
Salary sacrifice leaves you £160 a year better off. That's the 8% NI you don't pay on the £2,000. Net pay and relief at source come out the same for a basic-rate taxpayer.
£60,000 salary (higher-rate taxpayer)
| Net pay | Salary sacrifice | Relief at source | |
|---|---|---|---|
| Take-home pay | £43,557.40 | £43,617.40 | £43,557.40* |
*With relief at source, this assumes you claim the extra £600 of higher-rate relief. If you don't, you're £600 a year worse off. Above £50,270 you only pay 2% NI, so the salary sacrifice saving is smaller here, at £60 a year.
Things to know about salary sacrifice
- Your contractual salary is lower. That can affect mortgage applications, statutory maternity or paternity pay, and life cover or bonuses based on salary. Ask your employer how they handle these.
- It can't take your pay below the National Living Wage, which is £12.71 an hour for workers aged 21 and over in 2026/27.
- A cap is coming. The government has announced that from April 2029, only the first £2,000 a year of salary-sacrificed pension contributions will be free of National Insurance. The income tax relief is unchanged.
Percent of what?
Some schemes, including many auto-enrolment schemes such as NEST, work out contributions on qualifying earnings. That's your pay between £6,240 and £50,270, not your whole salary. If your payslip contribution looks lower than 5% of your salary, this is probably why. The calculator lets you choose either option under More pension options.
Compare the pension types on your own salary.
Open the calculator