Salary sacrifice

Salary sacrifice vs relief at source — which is better?

Three ways pension contributions are taxed in the UK — and why the method matters more than most people realise.

By Pension Bible editorial team·Last reviewed 9 April 2026·7 min read

How relief at source works

Relief at source (RAS) is the most common method for personal pensions, SIPPs, and some workplace schemes. The mechanic is straightforward: you pay contributions out of your post-tax, post-NI take-home pay. Your pension provider then claims basic-rate tax relief directly from HMRC and adds it to your pot.

In practice this means a 20% top-up. You contribute £800 and HMRC adds £200, giving you £1,000 in your pension. Your net cost is £800 to get £1,000 into the pot — a 25% effective uplift.

The mechanism works automatically for basic-rate taxpayers. For higher-rate taxpayers it only does half the job. HMRC adds 20% regardless of your actual tax rate. If you pay 40%, you are entitled to 40% relief — but the additional 20% has to be claimed through Self Assessment. HMRC does not add it automatically. Given that millions of higher-rate taxpayers never file a Self Assessment return, the relief regularly goes unclaimed.

How salary sacrifice works — the NI difference

Salary sacrifice is a contractual arrangement rather than a tax relief mechanism. You agree with your employer to reduce your gross salary by a set amount, and the employer pays that amount straight into the pension as an employer contribution. Because the money never appears on your payslip as salary, no income tax and no National Insurance is ever calculated on it.

For a basic-rate taxpayer earning between £12,570 and £50,270 in 2025/26:

• Relief at source: contribute £1,000 from post-tax pay, get £200 added by HMRC. Net cost: £800 for £1,000 in the pot. Effective saving: 20p per £1.
• Salary sacrifice: sacrifice £1,000 of gross salary. Save 20p of income tax plus 8p of employee NI. Net cost: £720 for £1,000 in the pot. Effective saving: 28p per £1.

The NI saving is the entire gap. Relief at source recovers the tax — it does nothing about NI. Salary sacrifice sidesteps both. For a basic-rate taxpayer making regular contributions across a full career, that 8-percentage-point difference compounded over decades is material.

For a higher-rate taxpayer above £50,270, employee NI drops to 2%. The sacrifice saving becomes 42p per £1 (40p tax + 2p NI) versus 40p per £1 via RAS — assuming the RAS taxpayer actually remembers to claim their higher-rate relief. In reality, the administrative friction of Self Assessment means many don't, making sacrifice the de facto better outcome even where the theoretical gap is small.

If your employer passes on their 13.8% employer NI saving — common in well-structured schemes — the economics shift even more sharply in favour of sacrifice. A £1,000 sacrifice could result in £1,138 or more going into the pension.

You can run your own numbers at the salary sacrifice calculator.

Net pay arrangement: the third option and the low-earner trap

There is a third method that rarely gets mentioned in the salary sacrifice debate: the net pay arrangement.

Under net pay, contributions are deducted from gross pay before income tax is calculated. So if you earn £30,000 and contribute £2,000, tax is calculated on £28,000. You get full tax relief at your marginal rate automatically — no need to claim higher-rate relief via Self Assessment, because the tax is simply never charged. For taxpayers, net pay is efficient and clean.

The problem is the net pay anomaly, which affects non-taxpayers — people earning below the personal allowance of £12,570 in 2025/26.

Under relief at source, HMRC adds basic-rate (20%) tax relief even if the member pays no income tax. A non-taxpayer contributing £800 still gets £200 added to their pot. Under net pay, there is nothing to add back: if you owe no tax, the arrangement cannot provide any relief. A non-taxpayer in a net pay scheme gets no top-up at all.

This hits low earners, part-time workers, and people in lower-paid sectors disproportionately. The government has been aware of this anomaly for years and introduced a top-up mechanism for low-income workers in net pay schemes from 2024 — but uptake and administration has been patchy, and not all providers have implemented it cleanly.

Who benefits most from each method

Basic-rate taxpayers who can access salary sacrifice: sacrifice wins, by 8 percentage points of NI saving.

Higher-rate taxpayers in a salary sacrifice scheme: sacrifice wins — automatically delivers the full 40% income tax saving plus 2% NI, without requiring a Self Assessment claim.

Higher-rate taxpayers in a relief at source scheme: you get the full benefit but only if you actively claim through Self Assessment. Many do not.

Non-taxpayers earning below £12,570: relief at source is better than net pay. The 20% top-up from HMRC is free money that net pay cannot replicate for non-taxpayers.

Workers with imminent mortgage applications: the income visibility trade-off complicates the picture — see the salary sacrifice and mortgage guide for detail.

When you can't choose

This is the practical caveat that most articles skip. The contribution method is decided by the pension scheme, not the member. Workplace schemes pick one approach and apply it across all members. You cannot opt into salary sacrifice if your employer does not offer it. You cannot choose relief at source if your employer's scheme runs on net pay.

The hierarchy of what to do if your scheme uses a less favourable method:

1. Ask HR whether salary sacrifice is available on the scheme. At many larger employers it is available but under-advertised.
2. If your employer scheme is net pay and you are a non-taxpayer, check whether you are receiving the government top-up compensation introduced in 2024.
3. Consider whether a separate personal pension (typically RAS) alongside a net pay workplace scheme could capture the top-up — though this adds complexity and requires contributions above the workplace auto-enrolment level.

The relief at source glossary entry covers the HMRC mechanics in more detail.

This is factual information, not financial advice. If you're unsure what's right for your situation, speak to an FCA-regulated financial adviser.