Pension Salary Sacrifice

What is salary sacrifice?

Salary sacrifice is an arrangement where an employee agrees to give up part of their contractual salary in exchange for a non-cash benefit, such as pension contributions.

Because the employee’s salary is reduced, income tax and National Insurance are calculated on a lower amount. This can create savings for both the employee and the employer.

Participation is entirely voluntary. However, it is important to recognise that salary sacrifice changes the employee’s contractual pay, so the arrangement must be clearly agreed and documented as a change to terms and conditions.

How can salary sacrifice increase pension contributions?

Under a salary sacrifice arrangement, an employee’s contractual salary is reduced by an agreed amount or percentage. That amount is then paid directly into their pension by the employer, alongside any standard employer contribution.

In practice, this means the total pension contribution increases without the employee needing to contribute from their take-home pay in the usual way.

For example, an employee might agree to sacrifice 5% of their salary, which is paid into their pension. The employer would then add their own contribution on top, increasing the overall amount going into the pension.

What are the main benefits?

The main benefit of salary sacrifice is the National Insurance saving for both employers and employees.

Because the employee’s contractual salary is reduced, National Insurance is calculated on a lower amount. This means both the employer and employee will typically pay less in National Insurance contributions.

For 2026/27, employers generally pay National Insurance at 15%, while employees pay 8% on earnings above the Primary Threshold and 2% on earnings above the Upper Earnings Limit. Reducing salary through salary sacrifice can therefore create savings for both parties, depending on the employee’s earnings level.

Another benefit is that employees may also reduce the amount of income tax they pay. As salary sacrifice lowers taxable pay, this can result in less income tax being due overall.

Are there any drawbacks?

There are a few important considerations when introducing salary sacrifice.

Because salary sacrifice reduces contractual pay, it can affect an employee’s entitlement to certain earnings-related payments, such as statutory maternity pay, paternity pay or other statutory payments, as these are based on average earnings.

Salary sacrifice arrangements must also not reduce an employee’s pay below the National Minimum Wage.

In addition, employees may notice a change in their take-home pay, which can affect personal budgeting. It’s important that employees understand how the arrangement works before opting in.

For employers, clear communication and proper documentation are key to ensuring the arrangement is understood and applied consistently.

What other non-cash benefits can be offered through salary sacrifice?

Aside from pension contributions, employers may offer a range of other non-cash benefits through salary sacrifice arrangements. Common examples include cycle to work schemes, electric vehicle schemes and certain workplace benefits such as health or dental cover.

Some legacy arrangements, such as childcare vouchers, may still apply for employees already enrolled, although these are no longer open to new applicants.

Salary sacrifice can be a useful way to structure employee benefits while creating potential tax and National Insurance efficiencies. However, it’s important for employers to consider how arrangements will operate in practice and ensure they are clearly communicated to employees.

When introduced and managed properly, salary sacrifice can form part of a well-rounded, practical benefits offering that supports both the business and its employees.

To find out more

If you would like to explore how salary sacrifice could work in practice for your business, or review your current approach, our team is here to help.

You can contact us on 01455 444 222 or email [email protected] to discuss your options.

At HR:4UK, we provide clear, practical HR and payroll support to help you make confident, compliant decisions.