Salary Sacrifice Pensions
What is salary sacrifice for pensions? Understand how salary exchange arrangements work and their tax advantages.
Last updated: 30 January 2025
Salary sacrifice can make pension contributions more tax-efficient.
How It Works
Standard Contributions
| Element | Detail |
|---|---|
| Employee earns | Full salary |
| Tax and NI | Deducted |
| Pension contribution | From net pay |
| Tax relief | Added back |
Salary Sacrifice
| Element | Detail |
|---|---|
| Employee agrees | To lower salary |
| Employer pays | Difference to pension |
| Lower salary | Less NI for both |
| More efficient | Overall |
The Savings
Employee National Insurance
| Without Sacrifice | With Sacrifice |
|---|---|
| Pay NI on full salary | Pay NI on reduced salary |
| 8% on earnings | 8% saved |
| Then contribute | Already contributed |
Employer National Insurance
| Without Sacrifice | With Sacrifice |
|---|---|
| Pay NI on full salary | Pay NI on reduced salary |
| 13.8% on earnings | 13.8% saved |
| Savings | Can share with employee |
Example Calculation
Without Salary Sacrifice
| Element | Amount |
|---|---|
| Salary | £30,000 |
| Employee pension (5%) | £1,500 |
| Employee NI on full salary | Higher |
| Employer NI on full salary | Higher |
With Salary Sacrifice
| Element | Amount |
|---|---|
| Reduced salary | £28,500 |
| Employer pension contribution | £1,500 |
| Employee NI | On £28,500 only |
| Employer NI | On £28,500 only |
| NI savings | Shared benefit |
Benefits
For Employees
| Benefit | Detail |
|---|---|
| NI savings | 8% on sacrificed amount |
| Same pension | Contribution |
| Similar take-home | After savings |
| More in pension | If employer shares savings |
For Employers
| Benefit | Detail |
|---|---|
| NI savings | 13.8% on sacrificed amount |
| Same pension cost | Or lower |
| Employee benefit | Attractive |
| Can share | Savings with employees |
Considerations
Reduced Salary Implications
| May Affect | How |
|---|---|
| Mortgage applications | Lower gross salary |
| State benefits | Based on earnings |
| Statutory payments | SSP, SMP based on earnings |
| Death in service | If salary-based |
Minimum Wage
| Rule | Must Follow |
|---|---|
| Cannot sacrifice | Below minimum wage |
| Post-sacrifice salary | Must meet NMW |
| Check | Each sacrifice |
Auto-Enrolment Compatibility
Works Together
| Position | Detail |
|---|---|
| Can use | For auto-enrolment |
| Same minimums | Apply |
| 8% total | Still required |
| Method | Changes only |
Contributions Still Count
| Element | Treatment |
|---|---|
| Employer contribution | Via sacrifice |
| Counts towards | Minimum requirements |
| 3% employer | Can be salary sacrifice |
| 5% employee | Becomes employer contribution |
Setting Up
Employment Contract
| Requirement | Detail |
|---|---|
| Written agreement | Required |
| Vary contract | Salary reduction |
| Employee consent | Must agree |
| Documented | Properly |
Cannot Force
| Position | Detail |
|---|---|
| Employee choice | To participate |
| Cannot mandate | Salary sacrifice |
| Alternative | Must offer |
| Auto-enrolment | Can be standard if preferred |
Life Events
Opting Out
| If Employee | Position |
|---|---|
| Wants to opt out | Of sacrifice |
| May need | Contract variation |
| Or wait | Until review date |
| Check | Scheme rules |
Changes in Circumstances
| Event | May Trigger |
|---|---|
| Maternity | Review needed |
| Reduced hours | May affect |
| Minimum wage | Risk check |
Tax Treatment
For Pension
| Position | Detail |
|---|---|
| No tax relief claim | Needed |
| Because | Gross contribution |
| Already | Pre-tax |
| Simpler | Administration |
For Employee
| Element | Treatment |
|---|---|
| Lower taxable salary | Shown on payslip |
| No tax relief | To claim |
| Already efficient | Built in |
Common Structures
Full Sacrifice
| Element | Detail |
|---|---|
| Employee contribution | All via sacrifice |
| Shows as | Employer contribution |
| Maximum | NI savings |
Hybrid
| Element | Detail |
|---|---|
| Part sacrifice | Part standard |
| Flexibility | For employee |
| Some | NI savings |
Who Cannot Benefit
Low Earners
| If | Position |
|---|---|
| Already below threshold | No NI anyway |
| No savings | To gain |
| Standard | May be better |
Minimum Wage Workers
| If | Position |
|---|---|
| Sacrifice takes below NMW | Cannot do |
| Illegal | To pay below minimum |
| Standard contributions | Only option |
Summary
Key Points
| Element | Detail |
|---|---|
| Salary sacrifice | Efficient method |
| NI savings | Both parties |
| Same pension | Contribution |
| Some impacts | On other benefits |
Considerations
| Factor | Check |
|---|---|
| Minimum wage | Compliance |
| Benefits impact | If relevant |
| Employee choice | Required |
| Documentation | Proper contracts |
Related answers
Pension Contribution Rates
What are the minimum pension contribution rates? Understand employer and employee contributions for auto-enrolment.
Pension Tax Relief
How does pension tax relief work? Understand tax benefits for workplace pension contributions and different relief methods.
Workplace Pension Contributions
How much must employers contribute to workplace pensions? Understand minimum contribution rates and qualifying earnings.
Frequently Asked Questions
- What is salary sacrifice for pensions?
- Salary sacrifice (or salary exchange) is an arrangement where an employee gives up part of their salary in exchange for the employer paying that amount into their pension. This saves National Insurance for both employee and employer.
- Is salary sacrifice better than normal pension contributions?
- Usually yes. With salary sacrifice, both employer and employee save National Insurance (13.8% and 8% respectively). The employee's take-home pay is similar, but more goes into the pension. However, it reduces your gross salary which can affect mortgage applications and benefits.
- Can auto-enrolment be done through salary sacrifice?
- Yes. Many employers use salary sacrifice for auto-enrolment contributions. The contribution levels must still meet the minimum requirements, but the method of payment can be via salary sacrifice, offering NI savings to both parties.