‘Salary sacrifice’ (also called ‘salary exchange’) is an arrangement employers make available to employees – the employee agrees to reduce their earnings by an amount equal to the employees’ pension contributions.
In exchange for reducing the amount of earnings paid to employees, the employer then agrees to pay the total pension contributions – from the employee and the employer. Any contributions paid to the pension provider will be classed as employer only contributions.
Using salary sacrifice means that the employee and the employer pay less National Insurance contributions (NIC). Employers may decide to maximise the amount of pension contributions by adding the savings they make in lower employer National Insurance contributions to the total pension contribution amount they pay.