Salary Sacrifice vs Relief at Source vs Net Pay Arrangement 2026/27

The three routes to pension tax relief

When money goes into a UK pension, the government provides tax relief to recognise that contributions come from income that has already been (or will be) taxed. There are three different mechanisms used in practice: relief at source (RaS), net pay arrangement (NPA), and salary sacrifice. Each operates differently, delivers different amounts of relief to different types of taxpayer, and involves different admin.

Relief at source is used by most personal pensions and SIPPs. You contribute the net amount, 80p to receive £1 in the pension, and your provider automatically claims the 20% basic-rate top-up from HMRC. If you pay 40% or 45% income tax, you must claim the extra 20% or 25% yourself via Self Assessment or by contacting HMRC. Net pay arrangement is used by many workplace schemes: contributions are deducted from gross pay before income tax is applied, so you never pay tax on the money in the first place. Salary sacrifice is different again, it is a contractual arrangement, not technically pension tax relief, where you give up a portion of your salary entirely and your employer makes the pension contribution instead.

Salary sacrifice: the NI advantage

The key advantage of salary sacrifice over both RaS and NPA is that the sacrificed amount also avoids National Insurance. Under RaS and NPA, your gross salary is unchanged, you still pay NI on the full amount. Under salary sacrifice, your contractual salary is reduced, so you pay NI on a lower figure. At the main employee NI rate of 8%, a £1,000 sacrifice saves £80 in NI on top of the income tax saving.

Employers benefit too: employer NI of 15% applies to the reduced salary only, saving the employer £150 per £1,000 sacrificed. Many employers pass some or all of this saving back as an enhanced pension contribution. If your employer does this, known as NI matching or passthrough, your effective pension contribution rate is higher than the headline figure, at no extra cost to you.

When NPA is better than RaS

For higher and additional-rate taxpayers who are not in a salary sacrifice scheme, a net pay arrangement is generally preferable to relief at source because relief is applied automatically at the correct marginal rate. Under RaS, a 40% taxpayer who forgets to claim the extra 20% on their Self Assessment return effectively receives only basic-rate relief, a costly mistake. Under NPA, the full 40% (or 45%) relief is built in.

However, NPA has historically disadvantaged non-taxpayers and those earning below the personal allowance. For 2024/25 onwards the government introduced a top-up payment for low earners in NPA schemes to address this disparity, but the administration is complex. Low earners in RaS schemes automatically receive 20% top-up even if they pay no income tax.

Practical considerations: can you actually use salary sacrifice?

Salary sacrifice requires your employer to offer it as an option and to amend your contract of employment. You cannot unilaterally decide to sacrifice salary, it must be a formal arrangement. Not all employers offer it, particularly smaller businesses. Where it is offered, the scheme rules govern the minimum and maximum sacrifice amounts and which benefits qualify.

The sacrifice must not reduce your cash salary below the National Minimum Wage for your age group, a constraint that limits the available sacrifice amount for low-paid workers. Salary sacrifice can also reduce mortgage affordability assessments since lenders may look at contractual salary rather than gross-plus-benefits. These are edge cases for most employees, but worth checking if they apply to you.

Summary comparison

For employed basic-rate taxpayers in a salary sacrifice scheme: always prefer sacrifice over RaS or NPA, it saves income tax plus NI. For employed higher-rate taxpayers in a sacrifice scheme: same applies, and the income tax saving is 40% or 42% (Scotland) versus just the 20% automatic RaS top-up. For self-employed: salary sacrifice is not available; use a SIPP under RaS and claim higher-rate relief via Self Assessment.