UK · Pensions
Salary sacrifice, net pay or relief at source: how your pension gets its tax relief
The same pension contribution can cost you different amounts depending on how your employer runs the scheme. Here's how the three methods compare in 2026/27, in Scotland and the rest of the UK.
By Stuart Mathieson · · 6 min read
If you've ever compared payslips with a friend on the same salary and the same pension percentage, and found your take-home pay was different, this is probably why. Workplace pensions give you tax relief in one of three ways, and they don't all cost you the same.
The maths of pension tax relief isn't the hard part. The hard part is working out which method your own payslip is using, and what that means for your take-home pay. So here's the plain version, with the take-home pay calculator to check your own numbers. All figures are for the 2026/27 tax year, 6 April 2026 to 5 April 2027.
The three methods in one paragraph each
Salary sacrifice. You agree to a lower salary, and your employer pays the difference straight into your pension. Because your pay is lower, you pay less income tax and less National Insurance. Your employer pays less National Insurance too.
Net pay arrangement. Your contribution comes out of your pay before income tax is worked out, so you get tax relief at your top rate automatically. National Insurance is still charged on your full salary.
Relief at source. Your contribution comes out of your pay after tax. You pay 80% of it, and the pension provider claims the other 20% from HMRC. If you pay tax above 20%, you have to claim the rest yourself through Self Assessment or by contacting HMRC. National Insurance is charged on your full salary.
You'll usually find out which one you have from your payslip: salary sacrifice shows a lower gross pay, net pay shows the pension deducted before tax, and relief at source shows the pension deducted after tax. If in doubt, ask your payroll or HR team.
What a 5% contribution actually costs
Here's someone putting 5% of salary into their pension. "Cost" is how much less they take home, after any extra relief they're entitled to claim back.
| Salary | Where | Into pension | Salary sacrifice | Net pay | Relief at source |
|---|---|---|---|---|---|
| £35,000 | Rest of UK | £1,750 | £1,260 | £1,400 | £1,400 |
| £35,000 | Scotland | £1,750 | £1,243 | £1,383 | £1,383 |
| £48,000 | Rest of UK | £2,400 | £1,728 | £1,920 | £1,920 |
| £48,000 | Scotland | £2,400 | £1,200 | £1,392 | £1,392 |
| £60,000 | Rest of UK | £3,000 | £1,740 | £1,800 | £1,800 |
| £60,000 | Scotland | £3,000 | £1,680 | £1,740 | £1,740 |
A few things stand out.
- Salary sacrifice is always cheapest, because it's the only method that saves National Insurance. Below £50,270 that's an extra 8% saving; above it, 2%.
- Net pay and relief at source cost the same - but only if you claim the extra relief you're due under relief at source. If you don't claim, the relief-at-source column would be higher.
- The Scottish £48,000 row is the striking one. A Scottish taxpayer on £48,000 is in the 42% higher rate band but still paying 8% National Insurance, so every pound they sacrifice saves 50p. £2,400 goes into their pension for £1,200.
Scotland's 50% band
That last point is worth its own section, because it's the best pension deal most Scottish earners will ever see.
Scotland's higher rate of 42% starts at £43,663. National Insurance doesn't drop from 8% to 2% until £50,270. On income between those two figures, you're paying 50% in total. Sacrifice salary from that slice and each £1 in your pension costs you 50p.
In England, Wales and Northern Ireland the same slice is taxed at 20% plus 8%, so the saving is 28p in the pound.
I explain the band itself in more detail in Scottish income tax explained.
Relief at source: the money people leave unclaimed
With relief at source, the provider only ever adds 20%. That works out fine for basic-rate taxpayers. Anyone paying more has to claim the difference, and nothing prompts you to do it.
- In the rest of the UK, a 40% taxpayer can claim another 20% on the part of their contribution taxed at 40%.
- In Scotland, a 21% intermediate-rate taxpayer can claim another 1%, and a 42% taxpayer another 22%.
On the £60,000 examples above, that's a £600 claim in England and £660 in Scotland every year. You claim it on your Self Assessment return, or, if you don't normally file one, by following HMRC's guidance on claiming tax relief on pension payments.
There's one quirk in the other direction. Scottish starter-rate taxpayers only pay 19%, but relief at source still adds 20%. HMRC lets you keep the extra 1%.
Low earners and net pay
Net pay has one weakness: if your income is below the £12,570 personal allowance, you pay no income tax, so taking the contribution off before tax saves you nothing. Relief at source would still have added 20%.
The government has been introducing top-up payments to close this gap, starting with the 2024 to 2025 tax year, and HMRC works out who qualifies. If you're a low earner in a net pay scheme, it's worth checking HMRC's latest guidance on how and when they're paid.
Things salary sacrifice can affect
Salary sacrifice reduces your actual contractual salary, which is why it saves National Insurance. That has knock-on effects worth knowing about before you sign up:
- Statutory pay. Statutory maternity, paternity and sick pay are based on your earnings, so they can be lower. If your earnings drop below the lower earnings limit you could lose entitlement altogether.
- Earnings-related benefits. HMRC warns it can affect earnings-related and contribution-based benefits.
- Minimum wage. A sacrifice can't take your cash pay below the National Minimum Wage, so employers cap it.
- Mortgages. Some lenders work from the lower post-sacrifice salary when deciding how much to lend. If you're about to apply for a mortgage, ask a broker how your lender treats it.
- Other pay-linked benefits. Life cover multiples or pay rises might be based on the lower figure, though many employers use a "notional" salary to avoid that. Your employer should tell you which.
The 2029 change
The government has announced that from April 2029, only the first £2,000 a year of pension contributions made through salary sacrifice will be free of National Insurance. Anything above that will have employee and employer National Insurance charged on it, as if it were salary.
Some things don't change:
- Salary sacrifice contributions will still be free of income tax.
- Employer pension contributions - the ones your employer makes on top - will stay free of National Insurance.
As a rough illustration, someone in the rest of the UK earning under £50,270 who sacrifices £5,000 a year would pay 8% National Insurance on the £3,000 above the cap - £240 a year - once the change starts, assuming today's rates. Until then, the figures in this guide apply. The detail will be set out in legislation, so I'll update the calculator when it is.
Which is best?
Usually you don't get to choose - your employer picks the scheme. But you often get to choose whether to use salary sacrifice when it's offered, and how much to put in. My rough rules:
- If salary sacrifice is on offer and none of the side effects above bother you, it's normally the cheapest way to save into a pension.
- If your scheme is relief at source and you pay more than 20%, put a note in your calendar to claim the extra relief.
- If your salary sits between £43,663 and £50,270 in Scotland, or between £100,000 and £125,140 anywhere in the UK, pension contributions are unusually cheap. The £100k tax trap guide covers the second one.
Remember the money is locked away until at least your mid to late 50s, so a cheap contribution is only a good deal if you won't need it before then. For anything complicated - several jobs, a large bonus or a pension that's near the annual allowance - it's worth speaking to a financial adviser.
To see the effect at your own salary, put your figures into the take-home pay calculator and switch between the three pension methods.
Run your own numbers
Written by Stuart Mathieson
I'm a freelance web developer based in Scotland, and I build and maintain every calculator on this site myself. I check the figures in these guides against HMRC, the IRS and the other official sources listed below, but I'm not a tax adviser - for decisions that matter, talk to one. More about me.