Your Pension Contributions Explained
Relief at Source vs Net Pay vs Salary Sacrifice
There are three common ways a workplace pension contribution can actually be taken from your pay, and they produce noticeably different numbers on your payslip for what looks like "the same" contribution. This page compares them side by side, with a worked example.
The three methods at a glance
| Method | When it's deducted | Reduces Income Tax? | Reduces National Insurance? | How relief is delivered |
|---|---|---|---|---|
| Relief at source | After tax and NI, from your take-home pay | No, your taxable pay is unaffected | No | Your provider tops up the pot with basic-rate relief; higher/additional-rate relief must be claimed separately |
| Net pay arrangement | Before tax, from your gross pay | Yes | No | Automatic, at your full marginal rate, a smaller Income Tax bill, not a bigger pot |
| Salary sacrifice | Before tax and NI, your contractual salary is reduced | Yes | Yes | Automatic, at your full marginal rate, plus National Insurance savings |
The Salary Calculator worked example uses relief at source, the simplest of the three to follow, and the most common for personal pensions and many workplace schemes.
Worked example: comparing the three pension contribution methods
Say you earn £45,000 a year and decide to put 5% of your salary (£2,250) toward your pension, however your employer's scheme happens to take it.
| Metric | Relief at source | Net pay arrangement | Salary sacrifice |
|---|---|---|---|
| Taken from your pay | £2,250.00 | £2,250.00 | £2,250.00 |
| Lands in your pension pot | £2,812.50 | £2,250.00 | £2,250.00 |
| Income Tax | £6,486.00 | £6,036.00 | £6,036.00 |
| National Insurance | £2,594.40 | £2,594.40 | £2,414.40 |
| Take-home pay | £33,669.60 | £34,119.60 | £34,299.60 |
- Relief at source deducts the £2,250 from your take-home pay first, after tax and NI, then your provider tops it up by £562.50, grossing it back up to what it would have been before tax.
- Net pay arrangement and salary sacrifice deduct the same £2,250 from your gross pay, before tax is calculated, so nothing needs restoring, but your Income Tax bill itself falls by £450 as a direct result (£6,486.00 → £6,036.00), which is why your take-home pay only drops by £1,800, not the full £2,250.
- Salary sacrifice goes one step further: because it's a genuine reduction to your contractual salary, not just a payroll deduction, your National Insurance is calculated on the lower figure too, an extra £180 saved (£2,594.40 → £2,414.40) that net pay arrangement doesn't get you. That's why salary sacrifice leaves you with the most take-home pay of the three for the same contribution: £34,299.60, against £34,119.60 for net pay arrangement and £33,669.60 for relief at source.
Relief at source's pension pot looks bigger here, £2,812.50 against £2,250, but that's not because it's more generous. It's because the 5% is measured differently: relief at source's 5% comes off your pay after tax, so once it's grossed back up it actually represents 6.25% of your gross salary landing in your pension, not 5%. Net pay arrangement and salary sacrifice's 5% is measured directly against your gross salary, so it stays at exactly 5%. Compare methods on a like-for-like basis, the same amount actually leaving your take-home pay, and relief at source and net pay arrangement work out equivalent for a basic-rate taxpayer; salary sacrifice is the one that's genuinely ahead, purely because of the extra National Insurance saving.
If you're a higher-rate or additional-rate taxpayer
The comparison above assumes a basic-rate (20%) taxpayer. If your income puts you in the higher (40%) or additional (45%) rate, the three methods pull further apart.
Net pay arrangement and salary sacrifice give you full relief at your actual marginal rate automatically, because the contribution comes off your taxable pay before Income Tax is calculated at all. If you're a higher-rate taxpayer, the reduction in your tax bill reflects the 40% rate you'd otherwise have paid on that slice of income, with nothing extra to claim.
Relief at source only claims back the basic 20% relief automatically, regardless of your actual rate. If you're a higher or additional-rate taxpayer using relief at source, you have to claim the difference yourself, through Self Assessment or by contacting HMRC directly. It isn't done for you. This is also mentioned on the Salary Calculator page, in the context of its own relief-at-source worked example.
Things to know before choosing
- Not every employer offers every method. Relief at source is common for personal and stakeholder pensions and many workplace schemes. Net pay arrangement is common in trust-based workplace schemes. Salary sacrifice needs your employer to run a scheme and requires your consent to reduce your contractual salary. It's optional even where it's offered.
- Salary sacrifice can't take your pay below the National Minimum or National Living Wage. That's a genuine hard limit that can cap how much you're able to sacrifice, particularly on lower salaries.
- Salary sacrifice genuinely lowers your contractual salary, which can affect anything calculated from that figure including mortgage affordability assessments, some means-tested benefits, and life assurance or income protection cover that's set as a multiple of salary. Worth checking before opting in.
- Employer National Insurance savings vary by employer. Your employer also pays National Insurance on your salary, separately from what you pay, and salary sacrifice reduces that too, since it's calculated on the same lower salary figure. Some employers pass some or all of that saving back into your pension as an extra employer contribution on top of yours; others simply keep it. There's no universal rule, so it isn't included in the worked example above. Ask your employer or scheme provider what they do.
- The Annual Allowance and adjusted net income rules still apply regardless of method. See Reducing Your Tax Through Pensions for how pension contributions interact with the 60% tax trap specifically, and why relief at source needs an extra step for adjusted net income purposes that net pay arrangement and salary sacrifice don't.
- If your employer put you into a pension automatically, this page still applies. Automatic enrolment decides whether you're contributing and sets the legal minimum, not how the money is taken from your pay. See Workplace Pension Auto-Enrolment Explained for the minimum itself, and how it's normally delivered as relief at source in practice.
- If you have a student loan, salary sacrifice reduces those repayments too, for the same reason it reduces National Insurance: repayments are calculated on the same gross pay figure NI uses, and salary sacrifice is the only method that actually lowers it. See Student Loan Repayments Explained for how repayments themselves work.
What's changing from 2029: a cap on the salary sacrifice National Insurance saving
This hasn't happened yet, but it's confirmed, enacted policy, not a proposal: the National Insurance Contributions (Employer Pensions Contributions) Act 2026 already has Royal Assent. From 6 April 2029, only the first £2,000 a year of salary sacrificed into a pension stays free of National Insurance, for both you and your employer. Anything sacrificed above that is treated as ordinary earnings for National Insurance purposes instead, the same treatment net pay arrangement and relief at source already have on the whole contribution. Income Tax relief on the full amount, and the National Insurance-free treatment of your employer's own separate contributions, are both unaffected. Only the extra NI saving that comes specifically from sacrificing your own salary is being capped.
This page explains general pension contribution methods and is not personalised advice; see the disclaimer. Which method is available to you and which suits you best depends on your employer's scheme and your own circumstances; speak to a qualified financial adviser before making decisions.