Three ways to pay into a pension, and what each one really costs
The short answer
Pension contributions get tax relief in one of three ways: salary sacrifice, net pay or relief at source. For a basic-rate taxpayer, £100 going into a pension costs £80 of take-home pay under net pay or relief at source, and £72 through salary sacrifice, because salary sacrifice saves National Insurance too. Higher-rate taxpayers get 40% relief whichever way they pay, but under relief at source they have to claim half of it back themselves.
The three ways, side by side
The method is set by your scheme, and salary sacrifice only applies if your employer offers it and you agree to it. A payslip or your scheme's welcome pack will tell you which you have. Here's what £100 arriving in your pension costs you in each case, in England, Wales or Northern Ireland in 2026/27:
| Method | Basic-rate taxpayer | Higher-rate taxpayer |
|---|---|---|
| Salary sacrifice | £72 | £58 |
| Net pay | £80 | £60 |
| Relief at source | £80 | £60, once you claim £20 back |
The tax relief is the same in all three. The difference is National Insurance: only salary sacrifice avoids it, saving 8% on pay up to £50,270 and 2% above that.
Salary sacrifice
You agree to a lower salary, and your employer pays the difference straight into your pension as an employer contribution. Because it never becomes your pay, there's no Income Tax and no National Insurance on it. Your employer saves its own 15% National Insurance as well, and some employers add part or all of that saving to your pension.
There are a few side effects to know about. Your official salary is lower, which can matter for a mortgage application, life cover worked out as a multiple of salary, or statutory pay such as maternity pay. And a sacrifice can't take your pay below the National Minimum Wage.
The rules are also changing. From April 2029, only the first £2,000 a year of pension contributions made through salary sacrifice will be free of National Insurance. Above that, both you and your employer will pay it. The Income Tax relief isn't affected.
Net pay
Many workplace pension schemes use this. Your contribution comes out of your pay before Income Tax is worked out, so you get relief at your top rate automatically, with nothing to claim. You still pay National Insurance on the full amount.
The catch used to be people earning less than the £12,570 Personal Allowance. They pay no Income Tax, so taking contributions out before tax gave them nothing. Since the 2024/25 tax year HMRC has made up the difference: after the end of the year it contacts people affected and pays the missing basic-rate relief directly. The top-up itself counts as taxable income.
Relief at source
Personal pensions and SIPPs work this way, as do some workplace schemes. You pay in from your take-home pay, and your provider claims 20% basic-rate relief from the government and adds it to your pot. Pay in £80 and £100 lands in the pension.
That 20% is added whether or not you pay tax, which makes relief at source the better deal for non-taxpayers. If you have no earnings at all, you can still pay in up to £2,880 a year and have it topped up to £3,600.
If you pay tax at 40% or 45%, the provider only claims the first 20%. The rest you claim through your Self Assessment return or, if you don't file one, directly from HMRC. It's easy to forget, and if you don't claim it, a 40% relief quietly becomes a 20% one. In Scotland, starter-rate taxpayers (19%) still get the full 20%, and intermediate-rate taxpayers (21%) can claim the extra 1%.
Worked example
An employee in England on £40,000 a year puts 5% (£2,000) into a pension. The whole salary stays in the basic-rate band, so each pound of contribution saves 20% Income Tax, plus 8% National Insurance with salary sacrifice:
| Method | Into the pension | Take-home falls by |
|---|---|---|
| Salary sacrifice | £2,000 | £1,440 |
| Net pay | £2,000 | £1,600 |
| Relief at source | £2,000 (you pay £1,600) | £1,600 |
On £60,000, the same 5% is £3,000, all of it taxed at 40%. Salary sacrifice costs £1,740 of take-home and net pay £1,800. Under relief at source you'd pay £2,400, and get £600 back once you claim the higher-rate relief, bringing it to £1,800 too. Your employer would also save £300 of its own National Insurance on the £40,000 salary sacrifice, and £450 on the £60,000 one.
Why it matters more on higher incomes
Pension contributions also reduce your adjusted net income, the figure several other rules are based on. Between £100,000 and £125,140 that wins back Personal Allowance, so the relief works out at 60% or more: see the 60% tax trap. Between £60,000 and £80,000 it reduces the High Income Child Benefit Charge: see the Child Benefit tax trap.
The limits
The annual allowance. Contributions from you and your employer together count towards a £60,000 annual allowance. Above it, a tax charge claws the relief back, although you can usually carry forward unused allowance from the previous three tax years. The allowance tapers down to as little as £10,000 for people with adjusted income over £260,000.
Your earnings. You only get tax relief on your own contributions up to 100% of your earnings for the year. Employer contributions, including salary sacrifice, aren't limited this way.
After you start drawing. Once you've taken taxable money flexibly from a pension, the money purchase annual allowance cuts what you can pay in with tax relief to £10,000 a year.
Work it out with your own figures
See what your pension could grow to, with tax relief and your employer's contributions.
Open the Pension CalculatorNext step: see the tax and take-home pay on your salary with a pension contribution.