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Salary sacrifice is an arrangement between an employee and employer whereby the employee agrees a reduction in their salary for a non-cash benefit. And because your salary has reduced, so does the amount of National Insurance (NI) and PAYE tax that you pay, reducing your tax liability.
This non-cash benefit in this instance is salary sacrifice.
Contractors earning an average of £120k pa, contributing £100 pd could save a massive £1100 pm or £13200 pa in tax and NI. And what’s more because your gross pay is reduced by the amount of your pension contribution, it also means that our employer’s NI is reduced, a saving we pass onto you in the form of additional gross pay.
As your gross pay is reduced by your pension contribution, so is your PAYE and NI contributions which can save you £00s each month.
Higher rate tax payers can utilise their pension contributions to reduce their tax liability.
As the contribution is made at source there’s no need to make manual adhoc payments.
At PayStream we like to go one step further which is why we give you more than just the norm, which is why our umbrella contractors also benefit from the following.....
As your gross pay is reduced by your pension contributions, so is the Employer’s NI, a saving we pass onto you in the form of additional gross pay.
Unlike other umbrellas, we work with the UK’s leading pension providers.
We can deal with fluctuating pay rates, varying contribution amounts and different pay frequencies.
Bal, Umbrella contractor
| Workplace | Stakeholder | SIPP | |
|---|---|---|---|
| Can you choose your own pension provider? | |||
| Can you make salary sacrifice contributions? | |||
| Is tax relief available on your contributions? | |||
| Avoid having to claim tax relief via a self-assessment | |||
| Is Employers NI passed down? | |||
| Do you receive employers contributions? | |||
| Can you control your investment options? | |||
| Are the contributions capped at £60,000? |
PayStream have partnered with Which? Recommended SIPP provider interactive investor (ii) who are the UK’s #1 flat-fee SIPP provider. Unlike most other providers who charge a percentage fee that grows as your pension grows, ii’s flat fee can potentially save you £00’s in additional charges.
Find out more
Ibrar, Umbrella contractor
The annual allowance from April 2023 is £60,000 based on adjusted income of £260,000 or below, but this tapers down to £10,000 where adjusted income is between £260,000 and £300,000, and then reduces to £10,000 above £300,000.
By sacrificing some of your pay you are agreeing to reduce your salary by an agreed amount. Reducing your salary may impact mortgage or loan applications and other benefits such as including statutory maternity or shared parental pay. You may also want to consider the impact on any insurance schemes you have in place – such as income protection, life assurance, mortgage protection etc. We suggest that you speak with your pension advisor for more advice.
If you’re unsure as to how much of your salary to sacrifice, we would always recommend speaking to a financial advisor. However, if you have a budget in mind, you could consider starting with the lower end of your budget, which will ensure you are maximising the tax allowances. You can always top up your personal pension, if you’re in a position to do so, as and when possible.
We still have to pay you national minimum wage and holiday pay which means that the amount you are sacrificing is just from your commission. And as your working hours or days may fluctuate throughout your assignment, we base our calculation on one working day.
Employers costs come in the form of Employers NI and apprenticeship levy. As your gross pay is reduced by the amount of your pension contribution it means that our employer’s NI is also reduced, a saving we pass onto you in the form of additional gross pay. As this is additional income it is subject to tax and NI in the normal way.
Adjusted income is your total taxable income – so includes all salary, bonus and commissions, dividends, rental income, savings interest plus the add back of any employer pension contributions. If your payments go above the annual allowance you’ll be subject to a tax charge (the “annual allowance charge”) on the excess so remember to look at all of your pension contributions, not just the ones through your umbrella company, and be sure to discuss with you Pension advisor.
Yes, if you no longer want to sacrifice gross pay in exchange for this pension contribution we can stop making such pension contributions and your gross pay will be increased. If this is the case please get in touch with us at pensions@paystream.co.uk. We will then issue you with a new letter by way of confirmation. However, you should note that if you do stop contributing, you will not be able to start again until the start of the next tax year which starts on the 6th April.
If your circumstances change and you wish to adjust your amounts call a member of our team who will support you with this.
Anyone earning over national minimum wage.
The main benefit of saving for your future via a pension are the tax breaks which are available in a pension plan. Unlike pensions, savings accounts don't have the same level of tax advantages. The disadvantages of savings accounts also include the erosion of value due to inflation and missing out on the generous tax breaks available with pensions.
Our Contractor Experience Team offer same day set up and are on hand to answer any questions you may have. Simply sign a form and you're good to go.
Updated April 2026.
