How to leverage the benefits of salary sacrifice

For employers only

Salary sacrifice is an arrangement you make with an employee, where they agree to reduce their earnings for another non-cash benefit, in this case an employer pension contribution.

By understanding more fully how it works and the potential advantages it offers both businesses and employees alike – you’ll feel better equipped to positively influence how much your employees are saving towards their retirement.


Is your business missing out?

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


How it works

By reducing their gross salary, employee’s pay less income tax and National Insurance Contributions (NICs). You’ll also save on National Insurance, which can be retained, added to increase your employer pension contribution, or a combination of both.2 Let’s cover that with an example to bring this to life. We’re using our Aegon individual and bulk calculators to help with the calculations. They offer two quote options:

  1. Keep net income constant: this allows an employee to maintain the same take-home pay and increase their pension contribution 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.

Using the first option, ‘keep net income constant’, we’ve created a scenario to highlight the financial benefits.

Before salary sacrifice position:

  •  Hannah has a salary of £40k a year and contributes 5% = £2,000 
  •  Her employer contributes 3% = £1,200 
  •  Total pension contribution = £3,200  
  • Her take-home pay is £29,262
  • The cost to her employer is £45,500

After salary sacrifice position: 

  •  Hannah sacrifices some of her salary, making her gross salary now £37,647.06 
  •  Her pension contributions remain 5%, but the sacrificed money is paid directly by her employer into her pension 
  •  The savings made from lower employer and employee NICs are added in.  
  •  Hannah’s total contribution increases to £3,877.65 
  • Her take-home pay remains the same at £29,262
  • The cost to her employer remains the same at £45,500

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 3 main benefits for an employee 

  1.  Salary sacrifice could grow their pension pot faster if the ‘keep net income constant’ quote option is chosen.  Using this quote option results in a higher overall pension contribution being made after sacrifice than before sacrifice. This would help increase the savings going into an employee’s pension pot. However, they should know that the value of an investment can fall as well as rise and isn't guaranteed.
  2. It can make their pension contributions more tax-efficient.2 Income tax and NICs are based on how much an employee 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 remains unchanged.2 Some employees might be worried about ‘reducing’ their gross income, but in reality, with the ‘keep net income constant’ quote option their take-home pay will remain unchanged, or potentially higher. The upside is that their pension will have more going into it each month and the whole process is easy for them because you’ll make the arrangements on their behalf.


The 3 main benefits for an employer 

  1.  There are no costs involved. Yes, that’s right. As an employer you can set up a salary sacrifice arrangement by changing the terms of your employee’s employment contract.3 There is no extra cost to offering them this option. It will involve some time on your part – more on that later.
  2. You may be able to save on NICs.3 If an employee chooses to use salary sacrifice, then you’ll also save on National Insurance. Which as we covered earlier, your business can keep, add to your employer pension contribution, or do a combination of both these things.
  3. Saving enough for the long-term and retirement is a big part of being financially well. If your employees have their finances in order and know they are doing what they need to for the future – it’s likely that they’ll spend less time worrying about money at work, which can harm productivity and engagement. You can read more on this topic with our article, discover the value of supporting employees financially.


Introducing salary sacrifice to your workplace

Salary sacrifice isn’t always an easy concept and can take a bit of time to set up and inform your scheme’s members about. However, by adopting and following a process to set up the arrangement, it help make sure that it’s being implemented correctly with the benefits (and possible implications) of doing so being clear to you as a business and your employees. Your workplace scheme adviser should be able to help guide you through the process and what you need to consider in more detail.

Salary sacrifice isn’t always suitable for everyone or could only have a minimal benefit for employees with low earnings. It shouldn't be used where the post-sacrifice salary will be less than the National Minimum Wage either.

Make sure you let your employees know to think about other things linked to their level of salary – such as statutory maternity pay, paternity pay, sick pay, working tax credit/child tax credit, State Pension or the amount they can borrow for a mortgage. If they’re unsure, you should encourage them to access professional financial advice.

Now you know more about how to leverage the benefits of salary sacrifice, and the options available – you can consider how this could fit into enhance your workforce's long-term financial wellbeing. For more articles like this visit our Employer Perspectives hub.



  1. Salary Sacrifice Pensions, Data Source, Workplace Pensions Direct and YouGov, Fieldwork was undertaken between 20th – 22nd April 2021.
  2. Tax relief and your pension, Data Source, MoneyHelper, as at Dec 2021.
  3. Salary sacrifice for employers, Data Source, GOV UK, as at July 2021.