Salary Sacrifice vs Relief at Source 2026/27

Published by the UK Money Calculators editorial team. Last updated for the 2026/27 tax year.

Pension tax relief comes in three forms: salary sacrifice, relief at source (RaS) and net pay arrangement (NPA). They are not equivalent. Salary sacrifice is the only one that also saves National Insurance. That makes it the most efficient route for employed people with access to a scheme. This guide explains all three methods with exact numbers.

The three methods side by side

How relief at source works

Under relief at source, you contribute from net pay. Your pension provider automatically claims 20% basic-rate tax from HMRC and adds it to your pension. For every 80p you contribute, £1 lands in the pension. If you are a higher-rate taxpayer, you must claim the additional 20% or 25% (Scotland) through Self Assessment — it does not happen automatically. NI is not affected. You pay full NI on your entire gross salary before any pension relief.

Example: Basic-rate taxpayer contributes £240/month (net). Provider claims 20% top-up: pension receives £300. Cost: £240/month. But NI is charged on the full salary including the pension contribution equivalent. Under salary sacrifice, gross pay would be lower and 8% NI would also be saved on the £300.

The NI saving gap, exact numbers

For a basic-rate taxpayer with a £3,000 annual pension contribution:

• Salary sacrifice: saves 20% income tax (£600) + 8% NI (£240) = £840 total saving. Net cost: £2,160.
• Relief at source: saves 20% income tax only (£600). Net cost: £2,400.
• Annual gap: £240 per year more expensive under RaS. Over 20 years: £4,800 in cumulative extra cost for the same pension contribution.

For a higher-rate taxpayer who makes the Self Assessment claim: both methods save 40% income tax. The difference is NI: 2% above the UEL = £60 per year on a £3,000 contribution. The gap is smaller at higher incomes, but salary sacrifice still comes out ahead.

Net pay arrangement: how it differs from both

Under a net pay arrangement, your employer deducts pension contributions from gross pay before income tax is applied. You get full marginal-rate relief automatically. No Self Assessment needed. But unlike salary sacrifice, it doesn't change your contractual gross. NI is still calculated on the full amount before the pension deduction. The NI disadvantage is the same as for relief at source.

NPA is generally better than RaS for higher-rate taxpayers who can't get salary sacrifice. It removes the risk of forgetting to claim extra relief via Self Assessment. Non-taxpayers can be worse off under NPA since they get no income tax relief, whereas RaS gives them a free 20% top-up from HMRC even on zero tax paid.

The government introduced a top-up mechanism for low earners in NPA schemes from 2024/25 to address this. But administration is complex and claims-based.

When salary sacrifice is not an option

Salary sacrifice requires your employer to offer it and to formally amend your employment contract. Self-employed people, directors of their own limited companies and employees whose employers don't run a scheme cannot use salary sacrifice for pension contributions. In these cases:

• Use a SIPP under relief at source and claim higher-rate relief via Self Assessment (if applicable).
• If your employer offers NPA, this is preferable to RaS for higher-rate taxpayers because relief is automatic.
• Ask your employer to introduce salary sacrifice, the employer also saves 15% NI, which is a compelling business case. Many small employers set up schemes after being asked by an informed employee.