How does salary sacrifice interact with pension contributions?

• A. Employee reduces salary in exchange for additional employer pension contributions, often with tax advantages.
• B. Employee increases salary to fund higher pension contributions.
• C. Employer contributions are reduced in proportion to salary increases during sacrifice.
• D. It has no impact on tax or pension contributions.

Answer: (A)

Salary sacrifice is an arrangement where you give up part of your gross pay in exchange for extra employer pension contributions. Because the salary is reduced, you pay less income tax and employee national insurance on the reduced amount, while the employer adds the sacrificed amount to your pension. The result is a larger pension fund funded by the employer, often with tax advantages for you and potential NI savings for the employer. In short, you trade some take‑home pay for higher employer pension contributions, with tax relief built in.