Updated: October 22, 2019

Salary Sacrifice Pension Tax Relief

How does opting for a salary sacrifice pension scheme affect your tax relief? This guide will outline everything you need to know.

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Tony Stevens

Author: Tony Stevens - Finance Expert

Updated: October 22, 2019

salary sacrifice scheme is a facility that many employer’s pension schemes can accommodate where instead of receiving your full salary, your employer gives you a ‘non-cash benefit’ towards your pension instead.

Because these contributions are paid into your pension, you’ll be eligible for tax relief, though how much you’re entitled to will depend on what tax rate you typically pay.

In this article, we’ll be looking at tax relief on salary sacrifice pension contributions and how they affect you, as well as the following topics:

What is the HMRC salary sacrifice scheme?

In a typical workplace pension scheme, your employer makes monthly contributions to your pension pot, which is usually a percentage of your salary.

If you opt to be on a salary sacrifice scheme pension scheme, you ‘sacrifice’ that percentage in exchange for a greater contribution to your pension.

Because you’re receiving a lower salary it means that your National Insurance contributions are reduced so you pay less tax. It’s worth noting that the amount you sacrifice can change and you can opt-out of being part of a sacrifice scheme at any time.

Opting for salary sacrifice pension contributions is a major decision as it may affect your future finances in a number of ways including your entitlement to state benefits.

Before deciding we recommend that you speak to a professional pensions advisor first. If you need help finding one, make an enquiry and we’ll put you in touch with one of the experts that we work with.

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Do you get tax relief on a salary sacrifice pension?

Yes, you can get tax relief on pension contributions under salary sacrifice. This means that for the amount of salary you choose to sacrifice, you won’t get taxed or have to pay National Insurance.

So overall, you pay less tax on what you earn.

For example, if you earned £38,000 a year and decided to sacrifice £3,800 of your salary you would receive £36,100 as your earnings, and instead of receiving £3,800 a year towards your pension from your employer, you’ll receive an annual contribution of £4,062.20. This would give you an additional £262.20 towards your pension tax free.

Who qualifies for tax relief?

Any pension contributions you make towards salary sacrifice will have tax relief benefits, though there are limitations in terms of how much tax relief you receive to make sure you’re not avoiding paying tax completely.

This will also ensure that you’re protected from not having other benefits affected such as maternity allowance, incapacity benefit and/or any other state pension benefits.

Can I claim tax relief on salary sacrifice pension contributions?

If your employer offers a salary sacrifice scheme then you should be able to enroll in it. If, however, the sacrifice lowers your earnings below the National Living Wage, then the scheme won’t be available to you.

When you salary sacrifice, you agree to reduce your earnings by an amount equal to your pension contributions. You can’t, therefore, claim additional tax relief because as an employee you’ve been taxed on a lower amount of salary.

Do I need to include salary sacrifice on my tax return?

No, you don’t need to show any salary sacrifice on your tax return. You only need to include your gross pay, which will be after the salary sacrifice has been taken into account. If you’re under self-assessment for tax, you must include all pension contributions in your tax return, except those under a salary sacrifice or net pay agreement.

How much salary sacrifice pension tax relief can I expect?

Depending on your tax bracket the amount of tax relief will vary:

  • Basic rate: As a basic tax rate payer who earns up £12,501 to £50,000 you usually pay 20% tax.
  • Higher rate: In this earnings category if you earn between £50,000 and £150,000 you usually pay 40% tax.
  • Additional rate: For the higher rate taxpayers who earn over £150,000 you usually pay 45% tax.

Speak to a pensions expert

A salary sacrifice pension will impact on how much salary you take home each month and can have a future effect on other benefits so before you decide to enroll in one it’s recommended that you speak with a professional pensions advisor. They’ll be able to look at your circumstances and advise you on what the impact would be for you.

You can arrange a free, no obligation consultation, or give us a call on 0808 189 0463. We’ll put you in touch with one of the experienced specialists that we work with who can give you advice tailored to your circumstances.

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We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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Tony Stevens

Tony Stevens

Finance Expert

About the author

Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

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