Pension Contributions
How pensions affect your take-home pay in 2026/27
Net Pay
Contributions before income tax. Automatic tax relief at your marginal rate.
Salary Sacrifice
Salary reduced before tax and NI. Saves income tax plus 8%/2% NI.
Relief at Source
Contributions from net pay. Provider claims basic-rate tax relief and adds it to your pot.
Workplace Pensions in the UK
Since 2012, employers have been required to automatically enrol eligible workers into a workplace pension scheme — a policy known as auto-enrolment. If you're employed, aged 22 to State Pension age, and earn more than £10,000 a year, your employer must enrol you automatically unless you opt out.
The minimum total contribution under auto-enrolment is 8% of qualifying earnings, where qualifying earnings are those between £6,240 and £50,270 per year. At least 3% of this must come from your employer — the rest (at least 5%) comes from you, boosted by tax relief.
Many employers contribute more than the minimum, particularly when a salary sacrifice arrangement is in place — because their own NI bill falls when employee salary is reduced.
The Three Types of Pension Contribution
1. Net Pay Arrangement
Your contribution is deducted from your gross salary before income tax is applied. You receive tax relief automatically at your marginal rate — 20% for basic rate taxpayers, 40% for higher rate, 45% for additional rate. This is common in occupational pension schemes (e.g. teacher, NHS, or company final salary schemes).
Limitation: basic-rate taxpayers who earn below the Personal Allowance don't benefit, because they have no tax to save.
2. Salary Sacrifice
You formally agree to a reduction in your contractual salary in exchange for your employer paying the equivalent amount into your pension. Because your salary is lower, you pay less income tax and less National Insurance. Your employer also pays less employer NI — many employers pass some of this saving back to employees as an enhanced contribution.
This is the most tax-efficient option for most employees. The main consideration: your reduced contractual salary may affect mortgage affordability assessments and some state benefits calculations.
3. Relief at Source
Contributions come out of your take-home (net) pay. Your pension provider then claims 20% basic rate tax relief from HMRC and adds it to your pot. If you're a higher or additional rate taxpayer, you can claim the extra relief through your self-assessment tax return.
This arrangement is common with personal pensions and SIPPs. It means the government tops up a 20% taxpayer's contribution by 25p for every 80p contributed.
Worked Example — Salary Sacrifice vs Net Pay
Suppose you earn £40,000 and contribute £200/month into your pension. Here's the cost in take-home pay under each arrangement:
Net Pay / Salary Sacrifice
Relief at Source
NI saving only applies to salary sacrifice. Both net pay and relief at source give the same tax relief — just through different mechanisms.
Annual Allowance & Limits
Annual Allowance 2026/27
£60,000
Maximum combined employee and employer contributions eligible for tax relief. Contributions above this may incur a tax charge at your marginal rate.
If you've flexibly accessed your pension (e.g. taken a taxable lump sum), the Money Purchase Annual Allowance (MPAA) applies — currently £10,000 — which severely restricts further contributions.
Higher earners (adjusted income above £260,000) have a tapered annual allowance that reduces by £1 for every £2 of income above the threshold, down to a minimum of £10,000.
Frequently Asked Questions
How do I know which pension type I have?
Check your payslip or ask HR. Net pay and salary sacrifice pensions both show a deduction from gross pay before tax is applied. Relief at source pensions show a deduction after tax — and the pension provider claims the 20% back on your behalf. You can also check your contract or scheme documents.
Can I change my contribution percentage?
Yes, in most workplace schemes you can increase your contribution above the minimum. Some employers will match additional contributions up to a cap — this is essentially free money and is almost always worth taking. Contact your HR or payroll team to change your contribution rate.
Does salary sacrifice affect statutory payments?
Salary sacrifice can reduce the earnings figure used to calculate statutory payments such as Statutory Maternity Pay (SMP), Statutory Sick Pay (SSP), and some means-tested benefits. This is worth considering before switching, though for most people the NI saving outweighs any impact.
What is the minimum employer pension contribution?
Under auto-enrolment rules, employers must contribute at least 3% of qualifying earnings (earnings between £6,240 and £50,270). Many employers contribute more, especially when operating a salary sacrifice scheme — because their own NI bill falls when employee salary is reduced.
Can I carry forward unused annual allowance?
Yes. If you were a member of a registered pension scheme in the previous three tax years, you can carry forward unused annual allowance from those years. This allows you to make larger contributions without triggering the annual allowance charge — useful if you receive a bonus or windfall.
Use the full salary calculator to model different pension contribution rates — and compare the impact of salary sacrifice vs net pay contributions on your monthly take-home.
Open salary calculator