Salary sacrifice and pensions
How salary sacrifice (salary exchange) can be good for you and your employees.
What is salary sacrifice?
Salary sacrifice, sometimes known as salary exchange, is a government-backed arrangement that allows both the employer and their employees to save on tax.
It works by allowing employees to exchange part of their salary in return for an employer pension contribution. Because their salary is being exchanged, their gross salary is reduced, meaning both the employer and employee don’t pay National Insurance contributions on the amount exchanged.
How does salary sacrifice help with pensions?
In short, the reduction in your employees’ salaries means they pay less on taxes and could increase their take-home pay or use their tax savings to top up their pension. Plus, as you pay in their total pension contributions their pension continues to grow.
What are the benefits of salary sacrifice?
You could:
- Pay less in National Insurance contributions (NIC)
- Improve your workplace benefits package
- Reinvest the money you’ve saved back into your business, pay it as extra contributions into your employees’ pension or a bit of both
Your employees could:
- Pay less in NIC and income tax
- Add to their take-home pay
- Boost their pension with the tax savings from their take-home pay
Use our salary sacrifice pension calculator
Discover the savings you and your employees could make. Simply download our calculator, add your latest contribution file (if you like) and get your results!
What are the tax savings with salary sacrifice?
The figures we’ve shown are based on:
- The 2025/26 tax year rates
- An employee’s pensionable pay of £30,000 a year
- A contribution rate of 5%
Employer savings
| 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 |
Employee savings
If an employee earned £30,000 a year and chose to exchange £1,500 (5%) into their pension, this would mean:
- Their salary changes to £28,500 a year
- Their employer pays £1,500 into their pension
- They pay less income tax and NIC as they’ve a lower taxable salary
- Their take-home pay goes up
How to set up pension salary sacrifice
It only takes a few simple steps:
- Contact your payroll.
Check if they can facilitate salary sacrifice. - Get your employees’ permission.
Before you change your employees’ employment contract, they must agree to the change in their contract through an agreement letter. If they don’t agree, you’ll need to take their contributions the usual way. - Create a new worker group.
Set up a ‘Salary Sacrifice’ worker group in your Online Services account. You’ll need to keep standard worker groups for employees who don’t agree to this arrangement. - Complete your final checks.
Once you’re good to go with salary sacrifice, before you send us your pension data. make sure:- Your worker groups match your payroll
- Your worker IDs have been updated on the file (if you’re submitting a data file)
Before choosing salary sacrifice, you should take specialist employment advice on how best to vary your employment contract.
Manage salary sacrifice in your Online Services account
This is where you can create your ‘Salary Sacrifice’ worker groups and keep tabs on employee contributions. Unsure how to set this up? Download our salary sacrifice worker group guide.
Are there any disadvantages to salary sacrifice?
Salary sacrifice won’t be for everyone, you should consider the following:
- Salary sacrifice might lower the amount of money your employees can borrow on loans and mortgages. It can even lower their life cover. However, some lenders will take salary sacrifice into consideration.
- An employee’s entitlement to state benefits eg Statutory Maternity Pay, Statutory Paternity Pay and the State Pension may be affected if their salary falls below the level at which they pay NIC.
- If an employee opts out of this arrangement, and you were sharing your NIC savings by increasing the employer pension contribution, you may want to reduce your employer contributions back to what you paid before.
- You can only offer salary sacrifice to your employees if it doesn’t reduce their salary to below the National Minimum Wage. From the 1 April 2025 this is £12.21 an hour for employees over the age of 21.
FAQs
For more information, see our help and support section.
Who benefits from salary sacrifice?
Both the employer and the employee. It’s a tax-efficient way for employees to increase their take-home pay and possibly boost their pensions. Employers can also choose to use their NIC savings towards their business, to pay more into their employees’ pensions or to do a bit of both.
Is salary sacrifice a good idea?
Whether it’s right for you and your employees will depend on several things. This can include:
- If your employees earn enough to qualify for salary sacrifice
- If this arrangement impacts their bonus and statutory benefits
- If your payroll provider can support with salary sacrifice
- If you’ve enough time to set up this arrangement (it generally takes three to six months)
It’s important to remember that salary sacrifice affects your employees’ terms and conditions of employment and is a matter of employment law, not tax or pensions law.
How much will it cost my company to set up salary sacrifice?
Nothing, it’s completely free to set up and manage with us.
Where can I get more information about salary sacrifice?
For more information on salary sacrifice, please read:
- The Pensions Regulator’s detailed guidance section 4
- HM Revenue and Customs’ salary sacrifice guidance
- Our employer guide on salary sacrifice
Good to know: We use the term ‘salary exchange’ instead of ‘salary sacrifice’ when talking to your employees. This is because some people might view the word ‘sacrifice’ negatively.
Salary sacrifice checklist
Make sure you’ve done everything you need to get set up.
Employee template letters
Give your employees the chance to opt in or out of salary sacrifice.
Employee guide
Help your employees learn about salary sacrifice and if it’s right for them.