Pension Deductions Explained.

Workplace pensions are brilliant for your future, but confusing on your payslip. Depending on how your employer sets it up, a 5% contribution might not actually cost you 5%.

Auto-Enrolment Rules

By law, if you are aged between 22 and State Pension age and earn more than £10,000 a year, your employer must automatically enrol you into a workplace pension.

The minimum total contribution is 8% of your 'qualifying earnings' (earnings between £6,240 and £50,270). This is usually split as 5% from you, and 3% from your employer.

The 3 Ways Pensions are Deducted

How the money leaves your payslip makes a huge difference to the tax you pay. Your employer will use one of these three methods:

1. Salary Sacrifice (The Best One)

You agree to give up a portion of your gross salary, and in return, your employer pays that money directly into your pension.

  • Because your gross salary is lower, you pay less Income Tax.
  • Because your gross salary is lower, you pay less National Insurance (NI).
  • This is the most tax-efficient method. A £100 contribution might only reduce your take-home pay by £68 (if you are a basic rate taxpayer).

2. Net Pay Arrangement

Your contribution is deducted from your gross pay before tax is calculated, but after National Insurance is calculated.

  • You receive your full tax relief immediately (so a basic rate taxpayer gets 20% relief instantly).
  • However, you do not save on National Insurance.
  • Common in the public sector (like the NHS or Teachers' Pension Scheme).

3. Relief at Source

Your contribution is deducted from your net pay (after tax and NI have already been taken).

  • Your pension provider then claims back the 20% basic rate tax from HMRC and adds it to your pension pot.
  • If you are a higher-rate (40%) taxpayer, you must claim the extra 20% back yourself via a Self Assessment tax return.
  • Common in smaller companies (e.g. using NEST).

Compare the different pension types

Our calculator lets you select "Salary Sacrifice", "Net Pay", or "Relief at Source" so you can see exactly how each method affects your take-home pay.

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