How a pension changes your take home pay
Pay £2,000 a year into a pension from a £40,000 salary and your take home falls by £1,600. If your employer uses salary sacrifice, it falls by £1,440.
The rest of the £2,000 is tax and National Insurance you no longer pay. How much comes back depends on the method your employer uses.
The same contribution, three ways
| Take home with no pension | £32,319.60 |
| Take home, net pay arrangement | £30,719.60 |
| Take home, salary sacrifice | £30,879.60 |
That is 5% of £40,000. Under a net pay arrangement, your employer takes the contribution before working out income tax, so you get full income tax relief at once. National Insurance is still charged on your full pay. You can spot it on a payslip, because the figure for taxable pay is lower than your gross pay.
With salary sacrifice, you agree to a lower salary and your employer pays the difference into your pension. Your pay really is lower, so income tax and National Insurance both shrink. Some student loan repayments shrink too, because they are based on pay.
The relief grows with your pay. On £60,000, the same £2,000 through net pay lowers take home by £1,200, because part of it would have been taxed at 40%.
If your provider uses relief at source
Some providers work differently. You pay from money that has already been taxed, and the provider claims 20% back from the government. Pay in £80 and £100 lands in the pot. If you pay tax at 40% or 45%, you claim the extra relief through Self Assessment. Our calculator models net pay and salary sacrifice only.
What auto enrolment asks of you
If you are 22 or over and earn more than £10,000 a year, your employer must put you into a workplace pension. The legal minimum is 5% from you and 3% from them. That is worked out only on earnings between £6,240 and £50,270, though many employers use a bigger slice of pay or pay more. Our tables apply a simple percentage to your whole salary, so treat them as a guide.
On £40,000, that minimum comes to £1,688 from you and £1,012.80 from your employer, £2,700.80 a year in all. Your share already includes the tax relief.
Your employer's share goes into the pension on top of your salary. It does not appear in your take home figure.
Before you agree to salary sacrifice
Because it lowers your official salary, it can affect some benefits and the amount a lender will offer for a mortgage. Ask your employer how it works and check with your lender if you are about to apply.
If you want to try your own numbers, pick a salary on the calculator and choose a pension rate. This is general information, not advice.
Keep reading
How UK income tax worksNational Insurance explainedHow student loan repayments workThe £100,000 tax trapHow UK tax codes work