Pension Salary Sacrifice vs Net Pay Arrangement: What’s the Difference?
Time to read: 5 minutes

Planning for retirement is essential, and understanding the different ways to contribute to a pension can significantly impact your take-home pay and tax savings. Two common methods used by UK employees are Salary Sacrifice and the Net Pay Arrangement. While they both aim to boost your pension savings, they operate quite differently.

In this post, we’ll break down what each method involves, how they affect your pay and tax position, and which might suit you best.

What Is Salary Sacrifice?

Salary sacrifice (also known as salary exchange) is an agreement between you and your employer where you give up a portion of your gross salary, and in return, your employer pays it directly into your pension on your behalf.

This means:

• You pay no Income Tax or National Insurance on the sacrificed amount.
• Your take-home pay increases slightly compared to making a standard pension contribution.
• Your employer may even top up your pension further using the National Insurance savings they make.

Example:

Let’s say you earn £40,000 and sacrifice £3,000 into your pension. Your taxable salary becomes £37,000. You save tax and NI on the £3,000, and your employer might add their NI saving (15%) on top, boosting your pension even further.

What Is the Net Pay Arrangement?

Under the Net Pay Arrangement, your pension contribution is deducted before tax from your gross salary but after National Insurance.

This means:

• You still benefit from full Income Tax relief at your marginal rate.
• However, you do pay National Insurance on the amount you contribute.
• This method is commonly used by public sector schemes and large private pension schemes.

Example:

If you earn £40,000 and contribute £3,000 via net pay arrangement, your taxable income becomes £37,000 – so you still get tax relief. But your National Insurance calculation is still based on the full £40,000.

Which Is Better?

It depends on your personal circumstances and your employer’s pension scheme setup.

✅ Salary Sacrifice is generally more tax-efficient, especially for basic rate taxpayers, as it offers both Income Tax and National Insurance savings. It can also increase eligibility for benefits like Child Benefit or Personal Allowance by lowering your official gross income.

❌ However, it may affect statutory payments like maternity pay, redundancy, or mortgage affordability assessments, since your official salary is reduced.

✅ Net Pay Arrangement still provides tax relief and keeps your gross salary intact for other purposes, which can be beneficial in some situations.

Important Note for Low Earners

If you earn below the personal allowance (£12,570 in 2025/26) and contribute to a pension using a net pay arrangement, you might not get any tax relief, as you don’t pay income tax to begin with. In this case, a relief-at-source pension scheme (like a personal pension or stakeholder pension) might be better, as HMRC will still top up your contributions by 20%.

Final Thoughts

Choosing between Salary Sacrifice and Net Pay Arrangement can have a meaningful impact on both your pension pot and your monthly pay. If your employer offers salary sacrifice, it’s usually the more efficient option—but it’s important to consider any implications for other financial matters.

Need help understanding what’s best for your situation? Speak to a tax adviser or get in touch with Taxes Done Right Ltd. We’ll help you take control of your financial future, one payslip at a time.