Salary Sacrifice vs Net Pay
Both methods can give pension tax relief through payroll, but they are not the same. The key 2026/27 difference is that salary sacrifice normally reduces employee National Insurance and payroll student-loan earnings; a standard net pay pension contribution normally does not.
| Feature | Salary sacrifice | Net pay arrangement |
|---|---|---|
| Income Tax | Salary is reduced before tax. | Employee contribution is deducted before Income Tax. |
| Employee NI | Normally calculated on the reduced salary. | Normally calculated on pay before the pension deduction. |
| Student loan through PAYE | Normally based on reduced salary. | Normally based on pay before the pension deduction. |
| Adjusted net income | Reduced because contractual taxable salary is lower. | Qualifying gross pension contributions can reduce adjusted net income. |
| How pension is funded | Employer contribution in exchange for lower cash salary. | Employee pension contribution deducted from pay before Income Tax. |
Why take-home can differ
If two employees put the same gross amount into a pension, salary sacrifice can leave more take-home than net pay because the sacrificed amount can also escape employee NI. For borrowers, it can additionally reduce PAYE student-loan deductions. The exact effect depends on salary, tax band, loan plan and the employer's scheme.
When net pay can still be perfectly good
Net pay still gives Income Tax relief automatically through payroll and is simple for many workplace schemes. The lack of the employee-NI saving does not make it “bad”; it just means it is mechanically different from salary sacrifice.
Check your employer's wording. “Net pay” is sometimes used casually to mean “taken from my payslip”. For tax purposes, net pay arrangement, relief at source and salary sacrifice are distinct pension methods.