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PENSION VIA THE CONTRACT
Salary sacrifice on a UK payslip.
Sacrifice is not a tax relief you claim later. The contract pay falls. Tax, National Insurance, and usually the student loan are worked out on what is left.
On £42,000 in England with no loan, income tax is 20% of £42,000 minus £12,570, which is £5,886. Employee NI is 8% of the same £29,430, which is £2,354. Take-home is £33,760.
Sacrifice 5%, which is £2,100. Pay for tax and NI becomes £39,900. Income tax falls to £5,466. NI falls to £2,186. Take-home is £32,248. You gave up £1,512 of cash (£2,100 minus £420 of tax and £168 of NI) and £2,100 went into the pension. The NI saving is the part a relief-at-source contribution does not give you, because that scheme does not lower NICable pay.
The calculator treats the pension box as sacrifice. Do not use it for a personal contribution that comes out after tax. Salary sacrifice can also affect borrowing evidence and some benefits that are tested on contractual pay. This page does not model those.
Questions
Does sacrifice reduce a Plan 2 loan?
If the sacrificed amount never becomes NICable pay, the loan percentage is applied to the lower figure. That is how the calculator behaves.
Is the employer’s NI saving passed on?
Sometimes, as extra pension. This page does not assume the employer shares the 15% employer NI it no longer pays.
The saving is tax plus National Insurance, not the whole 5%
On £42,000 in England, 5% sacrificed is £2,100. Tax falls by £420 because that £2,100 would have been in the 20% band. Employee National Insurance falls by £168 because it would have been in the 8% band. Take-home falls by £1,512, and £2,100 arrives in the pension. The £588 you did not pay is the part of the story a “5% pension” headline leaves out, and the National Insurance piece is the part a relief-at-source scheme does not give you.
Above the upper earnings limit the National Insurance saving shrinks to 2% of the sacrificed pay. In the higher-rate band the income-tax saving rises to 40%. Run the salary you have, not a rounded example, in the calculator.
What changes for a student loan
If the sacrificed pounds never become pay, Plan 2 is 9% of a smaller number. On £42,000 with a 5% sacrifice, pay for the loan is £39,900. Plan 2, threshold £29,385, is 9% of £10,515, about £946, instead of 9% of £12,615, about £1,135. The loan deduction falls by about £189 on top of the £420 of income tax and £168 of National Insurance. That loan effect is real in this model and it is not a reason to treat the loan as paid off. It only reduces this year’s repayment.
Employer National Insurance also falls, because employer NI is charged on the lower pay. Some employers add part of that saving to the pension. This page does not assume they do.