HENRY Knowledge · 6 September 2026

How does pension salary sacrifice work?

Understand the exchange of salary for employer pension contributions, percentage inputs and the practical payroll questions to ask.

Mark Graham, founder and product editor · General education, not personal advice. AI-assisted content; no independent professional review claimed. Tax examples concern 2026/27.

The exchange

Salary sacrifice changes your employment terms: you give up cash pay and your employer provides a benefit, such as a pension contribution. Employer agreement is required. Pension salary sacrifice can reduce taxable cash earnings and, under 2026/27 rules, National Insurance. Cash pay cannot fall below the applicable minimum wage. It can affect statutory pay and other earnings-linked benefits. See HMRC salary-sacrifice guidance.

Use percentages carefully

In our planner, 10% of £150,000 employment income means £15,000 a year. The percentage is applied to the whole annual employment-income figure entered, including any bonus you include. Your workplace may instead use basic salary, qualifying earnings or another pensionable-pay definition. A matching percentage in the tool and payroll therefore need not produce the same pound amount.

Questions for payroll

1. What pay figure is the contribution based on?
2. Can a bonus be sacrificed, and what election deadline applies?
3. Does the employer share any employer-NI saving?
4. Are benefits and salary references calculated using pre-sacrifice pay?
5. When will the change appear on the payslip?

Compare the full trade-off

Look at three figures together: annual pension input, reduction in take-home pay and cash left for your household. Include other employer pension payments when checking the total. The annual allowance rules apply across schemes; the planner does not confirm your personal limit.

Keep a copy of the agreed payroll instruction and compare the first affected payslip with your expectation. If the figures differ, investigate the pay basis before increasing the percentage again. This article and the tool concern 2026/27, not a guarantee that future tax treatment will remain the same.