Pension contributions: relief at source, net pay and salary sacrifice

Three modes

UK workplace pensions operate in one of three modes. The mode you pick changes how the contribution affects tax and NI.

Relief at source — the most common

• The contribution comes out of the employee's net pay (after tax and NI)
• The pension provider claims 20% basic-rate tax relief from HMRC on the employee's behalf
• Higher-rate taxpayers (40%) need to claim the additional relief themselves via their tax return
• No NI saving for anyone
• Default for NEST and People's Pension

Worked example: employee earns £3,000 gross, pays 5% pension on qualifying earnings.

• Pension contribution: £150 (taken from net pay)
• Tax relief: provider claims £30 from HMRC and adds it to the pension pot
• Net cost to employee: £120
• Cost to employer: just their own contribution

Net pay

• Contribution comes off gross pay before tax is calculated
• Employee gets tax relief immediately at their marginal rate — no separate claim
• No NI saving for anyone

Worked example: same employee, 5% net pay.

• Pension contribution: £150 (off gross)
• Taxable pay reduced by £150 → tax saving of £30 (basic rate) or £60 (higher rate)
• Net cost to employee: £120 (basic) or £90 (higher rate)

Subtle but important for higher-rate taxpayers — they don't need to file Self Assessment to claim the extra relief.

Salary sacrifice

• The employee formally gives up part of their salary
• The employer pays that amount into the pension (on top of their own contribution)
• Tax and NI both calculate on the reduced "post-sacrifice" salary

Worked example: same employee, 5% sacrifice.

• Sacrifice: £150 → gross drops to £2,850
• Tax saving: £30 (basic) or £60 (higher rate)
• NI saving: £12 (employee) plus £20.70 (employer)
• Net cost to employee: £108 (basic) or £78 (higher rate)
• Effective cost to employer: less than the £150 because of their own NI saving

Strongest tax efficiency of the three. The catch: it changes the employee's contractual salary, which affects things like mortgage applications and statutory leave calculations.

Which to pick

Situation	Recommendation
Default UK small business	Relief at source — pairs with NEST/People's Pension out of the box
Lots of higher-rate taxpayers	Net pay or salary sacrifice (better immediate relief)
You want maximum NI saving	Salary sacrifice
You don't want contract amendments	Relief at source or net pay

Set the default mode in Settings > Pension. You can override per employee on their Employment tab if needed.

Qualifying earnings or full pay

Regardless of mode, pension contributions can be calculated on:

• Qualifying earnings band — only earnings between £6,240 and £50,270 (FY26-27) count
• Full pay — the contribution percentage applies to the whole gross

Statutory minimum auto-enrolment uses the qualifying earnings band. Full pay is more generous (and more expensive) but easier to communicate to employees.