Offering salary sacrifice for your pension scheme is a workplace benefit that can also create value to you as an employer. Yet, many businesses haven’t adopted it – for reasons such as a lack of awareness or thinking it wouldn’t be of much benefit.1 Here we explain how it works, the pros and cons, and what to look out for when introducing and managing a salary sacrifice scheme.

What is salary sacrifice for pensions?

Salary sacrifice is an arrangement you make with an employee where they agree to reduce their earnings for a non-cash benefit of the same value. In this case – a pension contribution. By using salary sacrifice, employees will pay less in tax and National Insurance – and you also pay less in National Insurance Contributions.

Whether considering, introducing, or administering the scheme, there are some factors to think about, which we’ll explore further in this article.

Is your business missing out?

Research suggests that only 50% of businesses use a salary sacrifice scheme for their workplace pensions.1 Some of the reasons for not adopting salary sacrifice include that the respondents had never heard of it, were uncertain about the benefits, and thought it could be too much hassle.

By understanding more fully how it works and the potential advantages it offers, you might feel better equipped to positively influence how much your employees are saving towards their retirement.

How does salary sacrifice work?

By choosing to ‘sacrifice’ some of their gross salary, employees save by paying less income tax and National Insurance Contributions (NICs). They can choose to use this saving to either increase the total paid into their pension, or to increase their take-home pay. As an employer, you also save on NICs. You can choose to retain this saving, use it to increase your employer pension contribution, or a combination of both.

Here’s an example to bring these scenarios to life. We’re using our individual and bulk calculators to help with the calculations, which offer the two options we outlined:

  1. Keep net income constant – this lets an employee maintain the same take-home pay and increase the amount paid into their pension by sacrificing some of their salary. The employee contribution before sacrifice changes to a higher employer contribution after sacrifice.
  2. Keep pension contributions constant – this allows an employee to maintain the same pension contribution and increase their take-home pay by sacrificing some of their salary. The employee contribution before sacrifice changes to an employer contribution after sacrifice.

Both examples use the same ‘before sacrifice’ position.

Before salary sacrifice position:

  • Hannah has a salary of £40k a year and contributes 5% = £2,000
  • Her employer contributes 3% = £1,200
  • The total pension contribution = £3,200
  • Her take-home pay is £29,622.40
  • The total cost to her employer including NICs is £45,464.20

After salary sacrifice – option to increase pension and keep take-home pay the same

  • Hannah sacrifices some of her salary, making her gross salary now £37,647.03
  • Hannah is no longer making a direct personal contribution, but her employer’s contribution is increased accordingly. The savings made from lower employer and employee NICs are added into the contribution
  • The total contribution to Hannah’s pension scheme increases to £3,877.65
  • Her take-home pay remains the same at £29,622.40
  • The cost to her employer remains the same at £45,464.20

After salary sacrifice – option to maintain pension contribution and increase take-home pay

  • Hannah sacrifices some of her salary, making her gross salary now £38,000
  • Hannah is no longer making a direct personal contribution, but her employer’s contribution is increased accordingly. The savings made from Hannah’s lower NICs are added to her take-home pay
  • The total contribution to Hannah’s pension scheme remains at £3,200
  • Her take-home pay increases to £29,862.40
  • The cost to her employer reduces to £45,188

This is based on our understanding of current taxation law and HM Revenue & Customs practice, which may change. The value of the reduction in tax and National Insurance will depend on an individual’s circumstances.

The potential pros and cons of salary sacrifice for your employees


  1. Salary sacrifice could grow their pension pot faster if the ‘keep net income constant’ option is chosen. This is because it results in a higher overall pension contribution being made after sacrifice than before sacrifice. However, employees should know that the value of an investment can fall as well as rise and isn't guaranteed. The value of their pension pot when they come to take benefits may be less than has been paid in.
  2. It could make their pension contributions more tax-efficient. Income tax and NICs are based on how much someone earns. By lowering their salary, they’re also lowering the amount they have to pay in tax and National Insurance. Remember, this will depend on their current circumstances and could change in the future.
  3. Their net take-home income will remain unchanged or may even increase. Some employees might be worried about ‘reducing’ their gross income. But with the ‘keep net income constant’ option, their take-home pay will remain unchanged, and could even increase if the ‘keep pension contributions constant’ option is chosen.


  1. Salary sacrifice lowers your employees’ ‘on paper’ salary. While their take-home pay might stay the same, on paper their gross salary will look less. This could make it more challenging for them to get a mortgage or borrow money. However, it’s possible to opt out of salary sacrifice, which should help to address this issue if it becomes a problem in future.
  2. Having a lower salary may reduce the value of other salary-linked benefits, such as life insurance. A consultation with a financial adviser may be helpful if this is applicable.
  3. Any salary sacrifice cannot lower an employee’s income to below minimum wage. If they’re already on a low salary then they may not be able to join the scheme at all. Even if their income remains above minimum wage, it may fall below the threshold for paying NICs, which may in turn affect how much they get back in other benefits such as State Pension and statutory maternity pay in future.

The potential pros and cons of salary sacrifice for you as an employer


  1. There are no costs involved. As an employer you can set up a salary sacrifice arrangement by changing the terms of the employment contract. It will involve some time on your part, however – more on that later.
  2. You may be able to save on NICs. If an employee chooses to use salary sacrifice, then you’ll also save on National Insurance, which, as we covered earlier, you can keep, add to their pension pot, or do a combination of both.
  3. Saving enough for the long-term and retirement is a big part of financial wellbeing. If your employees have their finances in order and know they’re doing what they need to for the future, it’s likely that they’ll spend less time worrying about money at work. This can help to prevent any decrease in productivity and engagement. You can read more on this in our article, helping your employees become financial wellbeing all-rounders


  1. The terms of a salary sacrifice arrangement are written into the employment contract, which means if your employee requests a change during the course of their employment, the contract will need to be redrawn.
  2. Similarly, if your staff turnover is high, salary sacrifice schemes could increase the amount of admin required.
  3. Non-cash benefits such as salary sacrifice may need to be reported to HMRC separately, which again means higher administrative demand on your business.

Introducing salary sacrifice to your workplace

Salary sacrifice isn’t always an easy concept to understand and can take a bit of time to set up and engage members with. However, adopting and following a process to set up the arrangement can help to make sure that the scheme is being implemented correctly. It’s worth bearing in mind that salary sacrifice isn’t suitable for everyone. For example, for those on lower salaries, it could have a minimal benefit. Remember, employees can always opt out again if they find that it’s not a right fit for them or their circumstances change.

It’s important to make sure your employees understand other factors linked to their salary. For example, statutory maternity and paternity pay, sick pay, working tax credit/child tax credit, State Pension or the amount they can borrow for a mortgage. They could benefit from professional financial advice – they can find a financial adviser through the government’s MoneyHelper website. There’s likely to be a cost for this advice.

If you have a workplace scheme adviser, they can help guide you through the process and what you need to consider in more detail.

Is there a limit to salary sacrifice?

Any salary sacrifice made can’t reduce your employee’s income to below the national minimum wage. You should also make them aware of the annual allowance for pensions – this is £60,000 for the tax year beginning April 6, 2023.2 Any contributions above this threshold will be liable for tax, so your employees on higher earnings may wish to consider this when choosing how much they want to sacrifice.

Can employees opt out?

Yes, employees can choose to opt out of a salary sacrifice scheme. However, their employment contract will need to be redrawn to accommodate the changes.

Final thoughts on salary sacrifice for employers

Introducing salary sacrifice for your workplace pension scheme can make your business more attractive from a benefits point of view, but it does involve some extra admin. For your employees, there are notable benefits but things to bear in mind too, especially in terms of long-term financial planning.

Now that you know the options available, you can consider how maximising the benefits of salary sacrifice might fit into your plans to enhance financial wellbeing across your business.

  1. Salary Sacrifice Pensions, Data Source, Workplace Pensions Direct and YouGov, Fieldwork was undertaken between 20 to 22 April 2021 with 258 adults.
  2. UK Budget announcement on Lifetime Allowance and Annual Allowance tax. Data source, Scottish Public Pensions Agency. Accessed April 2023.


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