Work out your take-home pay
Income tax, National Insurance and net pay for any UK salary, 2026-27.
Employer National Insurance rose from 13.8% to 15% on 6 April 2026, and the Secondary Threshold at which it starts fell to £5,000 a year [1][2]. Against that backdrop, a salary sacrifice pension arrangement now saves an employer 15p in National Insurance on every pound an employee redirects into their pension, and it saves the employee a further 8p or 2p on the same pound [3].
Salary sacrifice is one of the few pension mechanisms that reduces the cost of employing someone rather than adding to it. For an SME running tight margins after the 15% rate took effect, the arrangement changes the arithmetic of a pension contribution and, in many cases, the arithmetic of the whole payroll.
This article explains how a salary sacrifice pension works, the exact 2026-27 National Insurance figures it turns on, how to size the saving for employer and employee, the traps that catch employers who set it up carelessly, and the £2,000 annual cap that Parliament has legislated to take effect from 6 April 2029.
Key takeaways
- Salary sacrifice lowers an employee's contractual pay in exchange for an equal employer pension contribution, so National Insurance is charged on the reduced figure.
- The employer saves 15% and the employee saves 8% or 2% of every pound sacrificed, at 2026-27 rates.
- Contributions are not tied to the auto-enrolment qualifying band: sacrifice can apply to the whole contribution, not just earnings between £6,240 and £50,270.
- Salary cannot be sacrificed below the National Minimum Wage, and sacrifice can reduce statutory maternity, paternity and sick pay if it drops average earnings.
- From 6 April 2029, only the first £2,000 of salary-sacrificed pension contributions each year will stay free of National Insurance.
How a salary sacrifice pension actually works
Salary sacrifice, which HMRC also calls salary exchange, is a contractual change. The employee gives up an agreed amount of gross contractual pay, and in return the employer pays that amount directly into the employee's pension as an employer contribution [3][4]. The employee's pay packet shrinks on paper, but the money still reaches their pension, and both parties pay less National Insurance because National Insurance is charged on the lower contractual salary.
The mechanism matters because it converts an employee pension contribution into an employer pension contribution. An ordinary employee contribution is deducted from pay that has already attracted National Insurance. An employer contribution never attracts National Insurance at all [3]. Salary sacrifice moves the contribution across that line.
The contractual change has to be genuine
HMRC only recognises a salary sacrifice where the employment contract is genuinely varied before the sacrificed pay is earned [4]. An employee cannot sacrifice pay retrospectively, and the reduced salary is the figure that becomes the employee's contractual entitlement. This is why a salary sacrifice needs a written variation to the contract and a clear effective date, and why HMRC guidance treats a sham arrangement as ineffective, leaving the original salary liable to National Insurance in full [4].
Employers running the arrangement in-house need to record the pre-sacrifice reference salary as well, because statutory payments, pay rises and mortgage references often depend on it. Most modern UK payroll software stores both the reference salary and the post-sacrifice salary so the two never blur.
The 2026-27 National Insurance figures the saving turns on
Every salary sacrifice calculation depends on three sets of numbers: the employer rate, the employee rates, and the thresholds at which each applies. The 2026-27 figures are set out below.
| Payer | Band | Rate 2026-27 |
|---|---|---|
| Employer | Earnings above the £5,000 Secondary Threshold | 15% [[1]](https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2026-to-2027) |
| Employee | Earnings between the £12,570 Primary Threshold and £50,270 Upper Earnings Limit | 8% [[2]](https://www.gov.uk/national-insurance-rates-letters) |
| Employee | Earnings above the £50,270 Upper Earnings Limit | 2% [[2]](https://www.gov.uk/national-insurance-rates-letters) |
The employer saving is the simpler of the two. On any pound of pay above £5,000 a year, the employer would otherwise pay 15% National Insurance, so sacrificing that pound into the pension removes 15p of employer National Insurance [1][3]. An employer that pays the Apprenticeship Levy saves a further 0.5% because the sacrificed pay leaves the pay bill as well [5].
The employee saving depends on where their earnings sit. A basic-rate employee earning between £12,570 and £50,270 saves 8% of every pound sacrificed [2]. A higher earner whose sacrifice comes out of pay above £50,270 saves only 2%, because that is the National Insurance rate that applies to the top band [2].
A worked example
Consider an employee earning £40,000 who sacrifices 5% of salary, £2,000, into their pension. Before sacrifice, that £2,000 sits comfortably in the 8% employee band and above the £5,000 employer threshold.
| Party | Saving on £2,000 sacrificed | Amount |
|---|---|---|
| Employer | 15% National Insurance | £300 [[1]](https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2026-to-2027) |
| Employee | 8% National Insurance | £160 [[2]](https://www.gov.uk/national-insurance-rates-letters) |
| Combined | Total National Insurance removed | £460 |
The employee also keeps income tax relief on the contribution, exactly as they would through any workplace pension, because the sacrificed pay never enters taxable income [6]. The £460 of National Insurance is the additional benefit that salary sacrifice unlocks over an ordinary contribution, and the £300 employer share is money the business keeps.
Salary sacrifice and auto-enrolment are not the same thing
A frequent confusion is that salary sacrifice replaces auto-enrolment, or that it is limited to the auto-enrolment minimum. Neither is true. Auto-enrolment sets the legal floor: every eligible jobholder aged 22 to State Pension age earning over £10,000 a year must be enrolled, with a minimum total contribution of 8% of qualifying earnings, of which the employer funds at least 3% [7][8]. Qualifying earnings for that minimum are the band between £6,240 and £50,270 [7].
Salary sacrifice is a funding method that sits on top of that duty. An employer can meet the auto-enrolment minimum through sacrifice, or sacrifice can fund contributions well above the minimum, on the whole salary rather than only the qualifying band. The two rules interact but do not overlap: auto-enrolment says how much must go in, and salary sacrifice changes how the money is routed and taxed. Employers who want a fuller picture of the enrolment duties can read the Moonworkers guide to auto-enrolment before layering sacrifice on top.
Certification and the contribution basis
Because sacrifice converts everything into an employer contribution, the payroll still has to prove the resulting contribution meets the auto-enrolment minimum. The Pensions Regulator allows employers to certify contributions against total earnings or a defined pensionable pay, provided the outcome equals or exceeds the statutory minimum calculated on qualifying earnings [8]. A payroll platform assessing workers each pay period needs to hold both the sacrifice figure and the certification basis so the minimum is demonstrably met.
The traps that catch employers
Salary sacrifice is powerful, but a careless setup creates liabilities that outweigh the National Insurance saving. Three traps account for most of the trouble.
The National Minimum Wage floor
Salary cannot be sacrificed below the National Minimum Wage or the National Living Wage [4]. The reduced contractual pay, not the pre-sacrifice pay, is the figure measured against the statutory minimum, so an employer offering sacrifice to a lower-paid worker must cap the sacrifice so the remaining pay never dips under the relevant rate. Paying below the minimum wage is a criminal matter, and HMRC can levy penalties of up to 200% of the underpayment and publicly name the employer [9]. This is the single most common reason a salary sacrifice scheme is unsafe for part of a workforce even when it suits the rest.
The effect on statutory pay
Statutory maternity, paternity, adoption and sick pay are calculated from average weekly earnings, and average weekly earnings are measured after sacrifice [10][4]. If a sacrifice drops an employee's average earnings, it can reduce the statutory payment they qualify for, and in an extreme case push them below the £6,708 Lower Earnings Limit that governs some statutory entitlements. Employers commonly pause or reduce sacrifice in the run-up to family leave to protect the employee's average weekly earnings figure, and good payroll practice flags the interaction before it bites.
Higher earners and the two thresholds
For an employee earning above £50,270, the National Insurance saving on the sacrificed pay is only 2%, because it comes out of the top band [2]. The income tax relief remains valuable, and sacrifice can still keep taxable income below cliff-edge thresholds such as the £100,000 personal allowance taper or the High Income Child Benefit Charge that starts at £60,000 of adjusted net income [11]. But the headline National Insurance saving is smaller than the 8% a basic-rate employee enjoys, so the arrangement should be explained honestly rather than sold as a flat saving.
Sizing the saving across a workforce
For a business weighing whether to offer sacrifice, the aggregate employer saving is the figure that decides the case. The table below shows the annual employer National Insurance saved for three illustrative sacrifice levels, per employee, at the 15% rate [1].
| Annual amount sacrificed | Employer NI saved at 15% | Employer NI saved on 20 staff |
|---|---|---|
| £1,200 | £180 | £3,600 |
| £2,400 | £360 | £7,200 |
| £3,600 | £540 | £10,800 |
Many employers recycle part of that saving back into the pension, increasing the contribution at no extra cost to the business, which strengthens the benefit for the employee and the retention case for the employer. The arithmetic scales cleanly, which is why sacrifice is common among larger payrolls and increasingly attractive to SMEs since the rate rose. Accountants managing this across several clients typically rely on a payroll bureau platform that calculates the sacrifice, the certification and the National Insurance position for every scheme in one place.
What changes on 6 April 2029
Parliament has legislated a cap on the National Insurance advantage of salary sacrifice. From 6 April 2029, only the first £2,000 of pension contributions made by salary sacrifice for each employee in a tax year will remain exempt from National Insurance [12]. Above that £2,000, both employer and employee National Insurance will apply to the sacrificed amount, at the standard 15% and 8% or 2% rates.
Income tax relief is not affected by the change, and employer pension contributions outside sacrifice remain free of National Insurance in the ordinary way [12]. The reform bites hardest on higher earners and on schemes that sacrifice large sums, and the Office for Budget Responsibility has estimated it will raise around £4.7 billion in its first full year [12]. For an employee sacrificing at or below £2,000 a year, the National Insurance saving continues unchanged after the reform date.
The timing gives employers and their payroll software three tax years to prepare. A platform that already tracks the sacrifice figure per employee is well placed to apply the £2,000 threshold automatically once it takes effect, so the cap does not become a manual reconciliation exercise at each payrun.
Work out the take-home effect of a sacrifice
Before setting a sacrifice level, an employer can model the effect on take-home pay and on the National Insurance bill with the Moonworkers UK salary calculator, which applies the 2026-27 PAYE and National Insurance rules to any gross salary.
£ per month
e.g. 1257L, S1257L, BR, D0
S = Scotland · C = Wales · W1/M1 = non-cumulative
Enter a salary or hourly rate above
About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method with periodised thresholds. It handles the three tax territories, K codes with the 50% regulatory limit and its carry-forward, weeks 53, 54 and 56, the cumulative and W1/M1/X bases, student and postgraduate loans, and pension contributions on qualifying earnings. It still won't match your payslip to the penny in every case: it does not cover in-year tax code changes, payrolled benefits in kind, NI deferral across more than one employment, directors on the annual earnings period, or employer-level annual adjustments such as the Employment Allowance and the apprenticeship levy. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. K-code carry-forwards and weeks 53, 54 and 56 are handled, and the Year-to-date section reproduces a specific period exactly. What your employer may apply that this does not: a mid-year tax code change, benefits in kind processed through payroll, or NI deferral across more than one employment. For most employees on a standard tax code the difference is negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category — if in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
Salary sacrifice has shifted from a nice-to-have to a mainstream response to a higher cost of employment. With employer National Insurance at 15% on earnings above £5,000, every pound routed through sacrifice removes a fixed 15p of employer cost and a further 8p or 2p for the employee, on top of the income tax relief every pension contribution already carries. Sized across a workforce, the saving is real money, and recycling part of it into the pension turns a tax efficiency into a genuine benefit.
The arrangement rewards precision. The minimum wage floor, the effect on statutory pay, and the £2,000 cap arriving on 6 April 2029 all reward an employer who treats sacrifice as a payroll discipline rather than a one-off perk. As the cap approaches, the schemes that will adapt most smoothly are the ones already running through software that records the reference salary, the sacrifice and the certification for every employee, every pay period.
Frequently asked questions
Does salary sacrifice reduce the amount that goes into a pension?
No. The full sacrificed amount is paid into the pension as an employer contribution, so the pension receives exactly what the employee gave up, plus any share of the employer National Insurance saving the business chooses to add. What falls is the employee's contractual salary and the National Insurance charged on it, not the pension contribution itself [3].
Can every employee use salary sacrifice?
No. An employee cannot sacrifice pay below the National Minimum Wage or National Living Wage, so lower-paid workers may only be able to sacrifice a small amount or none at all [4][9]. Employees should also weigh the effect on statutory maternity, paternity, adoption and sick pay, which are based on earnings after sacrifice [10].
How much National Insurance does an employer save through salary sacrifice?
At 2026-27 rates the employer saves 15% of every pound sacrificed, because that pay would otherwise attract employer National Insurance above the £5,000 Secondary Threshold [1]. An employer that pays the Apprenticeship Levy saves a further 0.5% as the sacrificed pay leaves the pay bill [5].
What happens to salary sacrifice pensions from April 2029?
From 6 April 2029, only the first £2,000 of pension contributions made through salary sacrifice for each employee in a tax year will be exempt from National Insurance, with both employer and employee National Insurance applying above that figure [12]. Income tax relief is unchanged, and contributions at or below £2,000 a year keep the National Insurance saving in full.
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