How salary exchange works

What is salary exchange?

It’s a type of arrangement you make with your employer, where you agree to give up a part of your salary to pay towards something else like leasing a car or childcare.

With pension salary exchange, it’s a similar thing – but this time when you agree to reduce your salary, it’s by the same amount of money you contribute into your pension. Your employer then pays your total pension contributions (yours and theirs) into your pension pot.

You might sometimes hear it called ‘salary sacrifice’.

How does salary exchange affect pensions?

Salary exchange gives you the opportunity to pay more into your pension pot. As your salary will be lower, so too will the taxes that you pay. Normally this means you’ll take home more money than usual when you get paid. With this extra money, you can choose to keep it or top up your pension – giving future you potentially a bigger pot.

What’s more, your employer has the option to pay their tax savings (National Insurance contributions) into your pension too.

How much can I save if I exchange my salary for pension contributions?

Imagine you were paid £30,000 a year and chose to exchange £1,500 (5% of your salary) into your pension.

This would mean:

• Your salary reduces to £28,500 a year
• Your employer would pay the £1,500 into your pension
• You’d pay less income tax and National Insurance contributions as you’ve a lower taxable salary
• Your take-home would pay go up by £120 a year (£10 a month)

We explain this in more detail in our table below. The figures we show are based on the 2025/26 tax year rates. When you join a workplace pension, your employer must choose one of two ways for you to get tax relief. This could be as ‘relief at source’ or ‘net pay’, so we’ve shown examples for both.

Good to know: Net pay is when your pension contributions are taken from your pay before your wages are taxed. Relief at source is the other way round, so your pension contributions are taken from your pay after your wages are taxed. In the table below, ‘NIC’ stands for National Insurance contributions.

	Relief at source	Net pay	Salary exchange
Gross annual salary	£30,000	£30,000	£30,000
Employee pension contribution	N/A	£1,500 Deducted before income tax and after NIC	£1,500 Deducted before income tax and NIC
Total taxable salary	£17,430	£15,930	£15,930
Income tax paid	£3,486	£3,186	£3,186
Employee NIC	£1,394	£1,394	£1,274
Employee pension contribution	£1,200 Deducted after income tax and NIC (net of 20% tax relief)	N/A	N/A
Additional take-home pay	N/A	N/A	£120 a year (10 a month)
Net annual salary	£23,920	£23,920	£24,040

Is pension salary exchange right for me?

With salary exchange you could:

• Pay less in National Insurance contributions and income tax
• Add to your take-home pay
• Boost your pension with your tax savings

But it’s also worth considering:

• If a lower salary could lower the amount of money you can borrow on loans and mortgages or affect any life cover you have. However, some lenders will take salary sacrifice into consideration.
• If there’s any impact to your state benefits. For example, Statutory Maternity Pay, Statutory Paternity Pay and the State Pension.
• If you pay a higher rate of income tax, this arrangement may affect your tax code and change the amount of income tax the government collects under PAYE.
• If you earn more than £260,000 with a tapered annual allowance, you might have to pay additional tax charges. Please visit the government’s website for more information.

You can only sign up to a salary exchange arrangement if it doesn’t reduce your salary to below the National Minimum Wage.

What can I do if I want to exchange my salary?

You can speak to your employer to find out if they offer salary exchange as part of their workplace pension. If they do and you earn enough to qualify, they’ll explain the next steps.

But first, you should find out more about salary exchange to make sure you understand the pros and cons.

Discover more about salary exchange:

• Visit the MoneyHelper website
• Download our guide on salary exchange
• Speak to a financial adviser – you can find one on the Unbiased website (note an adviser might charge for their service)

Do you pay tax on salary exchange pension contributions?

No, you wouldn’t pay tax on the pension contributions that are paid into your pension through salary exchange. Instead, these contributions would receive tax relief like your usual pension contributions.

You’d pay tax on your contributions if you went over the annual allowance limit. That’s the amount you can save into your pension in a year without getting taxed. For the current tax year, this limit is £60,000.

Learn more about pension tax.