How Does Salary Sacrifice for Pensions Work?

Salary sacrifice is a government-approved arrangement where employees agree to reduce their gross salary in exchange for their employer making equivalent pension contributions. This creates tax savings for both parties.

🔄 How It Works

The employee agrees to "sacrifice" part of their salary before tax

The employer pays this amount directly into the employee's pension

The employee's taxable income is reduced by the sacrificed amount

Both employer and employee pay lower National Insurance contributions

💰 Example: £50,000 Salary with 5% Sacrifice

Before Salary Sacrifice:

• Employee contributes 5% (£2,500) from after-tax pay
• Employer contributes 3% (£1,500)
• Total pension: £4,000
• Employee's net pay: £37,519.60
• Employer NI bill: £5,644.20

After Salary Sacrifice:

• New gross salary: £47,500 (reduced by £2,500)
• Employer contributes total £4,000 (£2,500 sacrifice + £1,500 original)
• Employee's net pay: £37,719.60 (£200 more)
• Employer NI bill: £5,299.20 (£345 less)

✅ Benefits for Employers

Reduced National Insurance contributions

Enhanced employee benefits package for recruitment and retention

Potential to reinvest NI savings back into pension schemes

Positive impact on company culture

✅ Benefits for Employees

Higher take-home pay due to lower National Insurance

More tax-efficient pension building

Particularly beneficial for higher-rate taxpayers

⚠️ Important Considerations

Salary Restrictions:

• Cannot reduce salary below National Minimum Wage
• May affect salary-linked benefits or mortgage applications
• Could impact statutory pay calculations (maternity, sick pay)

Documentation Required:

• Written employee consent
• Contract amendments or formal agreements
• Proper HMRC documentation for compliance

🛠️ Implementation Steps

Contact us to confirm your pension provider supports salary sacrifice

Obtain written employee consent

Update employment contracts or issue formal agreements

Configure payroll systems for the new arrangement

Document everything for HMRC compliance

📝 Setup Support

We can help you implement salary sacrifice arrangements with most pension providers. Some may charge implementation fees, which we'll outline upfront.

Ready to explore salary sacrifice for your team?

👉 Contact us here and we'll guide you through the process.