Salary Sacrifice vs Relief at Source
Salary sacrifice changes the salary paid by your employer. Relief at source is an employee pension contribution made from pay after tax and National Insurance, with the pension provider adding basic-rate tax relief. Higher-rate relief may need to be claimed separately.
| Feature | Salary sacrifice | Relief at source |
|---|---|---|
| What leaves your payslip | Your contractual cash salary is reduced. | You make a net employee contribution from pay. |
| Basic-rate tax relief | Tax is avoided on the sacrificed pay through payroll. | Provider normally adds basic-rate relief to the pension pot. |
| Higher/additional-rate relief | Reflected through lower taxable salary. | Further relief can be due and may need to be claimed from HMRC. |
| Employee NI | Normally reduced. | Not reduced by the pension contribution. |
| Student loan through PAYE | Normally based on lower salary. | Not reduced by the pension contribution. |
| Adjusted net income | Lower contractual taxable pay reduces it. | The grossed-up qualifying contribution is deducted when working it out. |
A £100 gross pension example
With relief at source, an individual would commonly pay £80 and the provider adds £20 basic-rate relief, making £100 in the pension. A higher-rate taxpayer may be entitled to more tax relief, but that extra relief is not normally added automatically to the pension pot.
Why adjusted net income still matters
Relief-at-source contributions can reduce adjusted net income by the grossed-up amount. That means relief at source can still be useful around the £100,000 Personal Allowance taper, even though it does not reduce employee NI or PAYE student-loan deductions in the same way as salary sacrifice.