There are two ways to pay your pension: the net pay way (you pay National Insurance on these contributions) and the salary exchange/sacrifice way (you don't pay NI on these).

Salary Exchange

With this payment method, you accept a reduction in your salary which your employer then pays directly into the pension scheme (they basically swap your pay [which you pay tax on] for your pension contribution you are already making [saving you tax].

The reduction in salary is a reduction in your gross earnings –i.e. before income tax and NI. The amount exchanged is therefore no longer subject to income tax and NICs –creating savings for you (compared to the Net Pay method).

The income tax saved is automatically added back into the pension –because the amount paid by the employer into the pension plan is the same as the gross amount exchanged. The NI savings are added to your take-home pay. Compared to the Net Pay method this means you get more in take-home pay. The full amount of the employee’s and the employer’s pension contributions are payable by the employer.

Net Pay

With this payment method, you pay personal contributions directly into the pension plan from your salary. The pension contribution payable is deducted from your pay before tax is calculated. You, therefore, obtain immediate tax but do not save any NI as with Salary Exchange and employer contributions remain unaltered.