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The default position when an employee enters an employer’s pension scheme is for their pension contribution to be deducted from net pay. This is also the case for automatic enrolment (see below and PenA 2008, s 33, which authorises deductions without requiring employee consent). While this is generally tax efficient (subject to certain limits - see the Pension scheme types guidance note), both employee and employer will suffer irrecoverable NICs on the salary contributed to the pension.

Alternatively, an employee can enter into a salary sacrifice agreement whereby they cease to make a contribution from their net pay and reduce their gross pay in favour of an increased employer pension contribution. It is important to remember that under a salary sacrifice arrangement employees will not actually be making a pension contribution; they are sacrificing salary and personal contributions in favour of increased employer contributions. Salary sacrifice arrangements are allowable under the automatic enrolment rules, but an employee cannot be obliged to enter into a salary sacrifice arrangement and the employer must make arrangements