What is salary sacrifice?

Salary sacrifice, sometimes known as salary exchange, is an arrangement employers can make available to employees – the employee agrees to a reduction in their salary or bonus that is equal to their pension contribution.

In return, the employer will pay in the employee’s total pension contributions.

Employers can switch to salary sacrifice if they submit their contributions on a net (relief at source) or gross (net pay arrangement) basis. They’ll also not need to inform HM Revenue and Customs about switching their pension scheme to salary sacrifice.

What are the benefits?

In short, everyone pays out less tax.

As the employee is sacrificing part of their salary, both employer and employee pay less in National Insurance contributions (NIC). The employee will also pay less income tax.

There are several potential benefits to this:

• Employees and employers can pay the tax savings into the employee’s pension pot – helping them save even more for the future.
• Employees can increase their take-home pay.
• Employers can offer an improved benefits package to their employees.
• Employers can reinvest the money they’ve saved back into the business.

These savings in action

Employer savings

The figures in the following example are based on 2025/26 tax year rates. They assume an annual average pensionable pay of £30,000 for each employee, with each employee contributing 5% into their pension:

	Salary sacrificed by the employee(s)	Employer NIC rate	Employer’s yearly NIC savings
1 scheme member	£1,500	15%	£225
50 scheme members	£75,000	15%	£11,250
500 scheme members	£750,000	15%	£112,500

The savings generated can be reinvested into the business, allocated to employees to enhance their pension pots (thereby improving retirement outcomes), or a combination of these options.

Employee savings

The calculations below compare the outcomes of an employee contributing to their pension through relief at source, net pay and salary sacrifice arrangements in the 2025/26 tax year. In this example, the employee earns pensionable pay of £30,000 a year and contributes 5% into their pension:

	Relief at source	Net pay	Salary sacrifice
Gross annual salary	£30,000	£30,000	£30,000
Employee pension contribution	N/A	£1,500 Deducted before IT after NIC	£1,500 Deducted before IT and NIC
Total taxable salary	£17,430	£15,930	£15,930
Income tax (IT) paid	£3,486	£3,186	£3,186
Employee NIC	£1,394	£1,394	£1,274
Employee pension contribution	£1,200 Deducted after IT and NIC (net of 20% tax relief)	N/A	N/A
Net annual salary	£23,920	£23,920	£24,040

While the value of the annual pension contribution remains unchanged in these examples, deducting them before calculating IT and NIC via salary sacrifice reduces the tax and NIC paid. As a result, the employee’s take-home pay increases by £120 a year (or £10 a month). This additional money can be added to their pension pot as a tax-efficient way to boost their retirement savings.

Setting up salary sacrifice

Employers can offer salary sacrifice to all employees, as long it doesn’t reduce their salary to below minimum wage. From the 1 April 2025 this is £12.21 per hour for employees over the age of 21, known as the National Minimum Wage. Salary sacrifice can’t take earning below the lower earnings threshold.

Getting set up in just a few simple steps:

1. Employers should get in contact with their payroll to see if they can facilitate salary sacrifice for the employer’s pension scheme.
2. Employees will need to agree to the change in their contract or through an agreement letter. Employers will need employees’ permission before entering them into a salary sacrifice scheme. If they don’t agree to salary sacrifice, employers will need to take their employees’ pension contributions in the usual way.
3. Employers will need to create a salary sacrifice worker group in their Online Services account. Make sure this is set up so that all contributions are paid by the employer and that the worker group is labelled accordingly eg ‘Salary sacrifice’. Please note, you’ll still need a standard worker group for those employees that don’t agree to pay in their pension contributions using salary sacrifice.
4. Once the employer has received their employee’s permission and has their new worker group in place, they can set up the salary sacrifice scheme through their payroll. Before sending us any pension data over to us, make sure your worker groups match your payroll and, if submitting a data file, your worker IDs have been updated on the file.

Unsure how to set up a salary sacrifice worker group? Download our step-by-step guide.

Make sure it’s right for you

Salary sacrifice won’t be for everyone, so there are a few things to consider before setting it up:

• Employees may receive lower life cover as well as lower borrowing available on loans and mortgages. This is because of a lower take-home income. However, most providers will take salary sacrifice into consideration.
• Employees’ entitlement to state benefits eg Statutory Maternity Pay and the State Pension may be affected if their salary falls below the level at which they pay National Insurance contributions.
• If an employee opts out of a salary sacrifice arrangement, employers will need to make an adjustment to their refund to pay back the NIC (as the saving in NIC only applies if their money remains inside a pension).
• Remember, employers won’t be able to offer salary sacrifice if it reduces employees’ salary to below the National Minimum Wage.

Salary sacrifice affects the employee’s terms and conditions of employment and is a matter of employment law, not tax or pensions law. 

More information on salary sacrifice/salary exchange:

• The Pensions Regulator in detailed guidance section 4
• HM Revenue and Customs salary sacrifice guidance