How salary sacrifice saves both income tax and NI, and how to make the most of the annual allowance.
When you contribute to a pension, HMRC adds back the income tax you would have paid on that money. A basic rate taxpayer contributing 80 gets 100 in their pension. A higher rate taxpayer contributing 60 gets 100. This is free money from the government.
| Tax Rate | Real Cost Per 100 in Pension |
|---|---|
| Basic rate 20% | 80 |
| Higher rate 40% | 60 |
| Scottish Higher 42% | 58 |
| Additional/Advanced 45% | 55 |
| Scottish Top 48% | 52 |
Salary sacrifice reduces your gross salary before tax AND National Insurance are calculated. This saves both. A 2,500 salary sacrifice saves 500 in income tax PLUS around 200 in NI for a basic rate taxpayer. Real cost: 1,800. A personal pension contribution only recovers income tax.
Between 100,000 and 125,140 your Personal Allowance is gradually withdrawn, creating an effective 60% marginal tax rate. A pension contribution that brings your income below 100,000 restores your full Personal Allowance. This can save over 2,000 in a single year.
You can contribute up to 60,000 per year to your pension including employer contributions and receive full tax relief. Most people are nowhere near this limit. If you earn less than 60,000 the limit is your total earnings for the year.
Does salary sacrifice work differently in Scotland?
Same mechanism, but Scottish taxpayers on the 42% Higher band save significantly more per pound contributed than equivalent earners in England.
What is the annual allowance?
You can contribute up to 60,000 per year including employer contributions and receive full tax relief. Exceeding this results in a tax charge.
Free, accurate, 2026-27 rates. Scotland and tax code supported.