Salary sacrifice vs net pay vs relief at source: UK pension methods

Last updated: 5 May 2026

TL;DR

UK workplace pensions use one of three relief mechanisms. Salary sacrifice reduces gross pay before income tax and NI. Net pay deducts contributions before income tax (relief at marginal rate) but after NI. Relief at source deducts after tax and the provider reclaims basic-rate relief, with higher-rate taxpayers claiming the rest through Self Assessment.

In one sentence

The three methods all eventually deliver tax relief, but they differ on whether NI relief applies, when the relief is granted, and how the contribution appears on the payslip.

What is salary sacrifice?

Salary sacrifice - sometimes called a SMART or SmartPension arrangement - is a contractual agreement where the employee gives up part of their gross salary in exchange for the employer paying that amount directly into the pension. Because the sacrificed amount never becomes salary, it is not subject to income tax or National Insurance. The employer also saves Class 1 secondary NI, which many schemes pass back to the employee in the form of a higher employer contribution.

On the payslip, the gross pay line is the post-sacrifice figure. There is typically no separate "pension" deduction line under the employee's contribution because the contribution has already happened above gross. PAYE and NI are calculated on the reduced gross.

What is net pay (sometimes called "net-pay arrangement")?

Net pay is a slightly counter-intuitively named method. Despite the label, the contribution is deducted from gross pay before income tax is calculated, but after National Insurance has been calculated on the full gross. The result is that employees receive income-tax relief at their marginal rate immediately, but no NI relief. The contribution is paid into the pension scheme without further reclaim.

On the payslip, you will see the full gross, then a pension deduction, then PAYE calculated on the post-pension figure. NI is calculated on the pre-pension gross. Most traditional occupational schemes use this method.

What is relief at source?

Relief at source is the method most personal pensions and some workplace schemes (notably NEST and similar master trusts) use. The employee's contribution is taken from net pay - after income tax and NI - and the pension provider reclaims basic-rate income-tax relief from HMRC and adds it to the pot. A 20% top-up on the contribution is the headline number you will see in marketing materials.

Higher- and additional-rate taxpayers do not receive their full relief automatically. To claim the extra 20% (higher rate) or 25% (additional rate) above basic, they must file Self Assessment or contact HMRC directly. This is one of the most commonly missed reliefs - see our PAYE vs Self Assessment page for context.

Side-by-side comparison

Dimension	Salary sacrifice	Net pay	Relief at source
Contribution made from	Pre-tax, pre-NI gross	Pre-tax, post-NI	Post-tax, post-NI
Income-tax relief	Automatic at marginal rate	Automatic at marginal rate	20% via provider; higher-rate via SA
NI relief	Yes (employee + employer)	No	No
Effect on gross pay shown on payslip	Reduced	Unchanged	Unchanged
Pension line on payslip	Often hidden / shown as employer contribution	Deduction before PAYE	Deduction after PAYE
Higher-rate taxpayer claim required?	No	No	Yes - via Self Assessment
Affects statutory pay (SMP, SSP)?	Possibly - based on reduced gross	No	No
Affects mortgage gross figure?	Possibly - lender-dependent	No	No
Common in	Many large employers	Traditional occupational schemes	Personal pensions, NEST and similar
Maximum relief efficiency	Highest (income tax + NI)	Income tax only	Income tax only
Risk of missed relief	Low	Low	High for higher-rate taxpayers

Wondering which method your payslip is on? Run a free payslip check - we will identify the method and flag any missed relief.

Worked example: £40,000 salary, 5% contribution (2026/27)

For a basic-rate taxpayer with a £40,000 gross salary contributing 5% (£2,000) per year, ignoring student loan and using rUK rates:

Salary sacrifice: gross drops to £38,000. Income tax saved on £2,000 at 20% = £400. NI saved on £2,000 at 8% = £160. Total saving £560 - pension still receives £2,000.
Net pay: gross stays at £40,000. £2,000 contribution reduces taxable pay, saving £400 in income tax. NI is unchanged. Pension receives £2,000.
Relief at source: £2,000 is paid from net pay; the provider reclaims basic-rate relief, so the pension actually receives £2,500 (the £2,000 plus £500 top-up). The basic-rate taxpayer's overall position is similar to net pay.

For a higher-rate taxpayer, the relative ranking is the same but the gap widens - provided the relief-at-source taxpayer remembers to claim the extra relief through Self Assessment. Many do not, which is why this is one of the most-missed UK tax reliefs.

When each method is used

Salary sacrifice is common in larger employers, particularly in finance, tech and the public sector with bonus arrangements. It needs employer set-up and a contractual variation, but where it is offered it is usually the most efficient route.

Net pay is the legacy default for many traditional occupational schemes, including those run via a trust. It is simple, automatic, and covers higher-rate relief without further action.

Relief at source is the default for personal pensions (SIPPs, stakeholder) and for several auto-enrolment master trusts including NEST. It is administratively simple at scheme level but creates a known equity issue: low earners below the personal allowance still receive 20% top-up under relief at source, but get no relief under net pay until HMRC's top-up scheme equalises (a regime that has been evolving - see gov.uk).

Pros and cons

Salary sacrifice

Pros: NI relief, automatic at all tax rates, often the largest in-pocket benefit. Cons: reduced headline gross can affect statutory pay, mortgages and life-cover multiples; relies on employer setup.

Net pay

Pros: automatic relief at marginal rate; no Self Assessment needed. Cons: no NI relief; low earners below the personal allowance get nothing without HMRC's top-up scheme.

Relief at source

Pros: simple admin; basic-rate relief equal for everyone including sub-allowance earners; portable across personal pensions. Cons: higher-rate taxpayers must remember to claim via Self Assessment; easy to leave money on the table.

Frequently asked questions

Which method gives the most relief?

For typical employees, salary sacrifice tends to give the largest in-pocket benefit because it reduces both income tax and National Insurance on the contribution. Net pay matches it on income tax but not on NI. Relief at source matches it for basic-rate taxpayers but requires Self Assessment to claim higher- and additional-rate relief.

How do I tell which method my scheme uses?

Look at the payslip. Salary sacrifice usually shows a reduced gross pay. Net pay shows a deduction labelled 'pension' before tax. Relief at source shows a deduction after tax with the provider claiming basic-rate relief on top.

Does salary sacrifice affect my mortgage application?

It can, because the headline gross figure on a payslip is lower under salary sacrifice. Many lenders are familiar with this and will use the pre-sacrifice figure where evidence is provided, but it is worth confirming with the lender.

Can I switch methods?

Switching method is a scheme-design decision usually made by the employer. Employees can typically choose contribution levels but not the relief mechanism. Joining or leaving salary sacrifice has employment-contract implications.

Educational content based on HMRC and TPR guidance for 2026/27. Not regulated tax or pensions advice - consult a regulated adviser for personal recommendations.

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