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Salary sacrifice (often called “salary exchange”) is a simple way to stretch your benefits budget and help employees save more for retirement. In short, an employee agrees to give up part of their future gross pay and, in return, you pay that amount into the workplace pension as an employer contribution. Because the payment is treated as an employer contribution – rather than an employee deduction - both parties can save on National Insurance, and employees may get all their tax relief immediately each month (as opposed to possibly needing to complete a self-assessment tax return).
What are the benefits?
- Lower payroll costs: Reducing contractual cash pay lowers the employer National Insurance due.
- Cleaner administration: Contributions are paid as employer payments, which can simplify payroll and reduce queries about relief mechanisms.
- Employee value: Staff typically see a higher take-home pay whilst making the same gross contributions each month.
What to watch out for?
Salary sacrifice changes the employee’s contractual cash pay, so you must keep several safeguards in view:
- National Minimum Wage / National Living Wage: You cannot sacrifice salary that would take pay below these thresholds.
- Personal Allowance: An employee may miss out on pension tax relief if they are earning less than the personal allowance but contributing via salary sacrifice.
- Statutory payments: Sacrificing salary can reduce average weekly earnings used to determine eligibility and amounts for statutory payments (for example, statutory maternity/paternity/sick pay) . For some employees, entitlement could be reduced or even lost—so check carefully before enrolling lower earners.
- Linked pay benefits: Any benefits or insurances calculated as a multiple of salary (e.g., life assurance) and affordability assessments (e.g., mortgages) may be affected if you define salary as post-sacrifice. Many employers maintain a “reference salary” for HR documents and insurers to avoid unintended consequences.
How it works in practice
When set up correctly in your payroll software, sacrificed amounts you pay to the scheme are employer contributions—so they’re not treated as taxable pay for the employee. Employees don’t claim basic or higher-rate “tax relief” in the usual way; instead, their taxable pay is lower from the outset, typically improving take-home pay.
Implementation checklist
- Design your policy: Decide eligibility, default exchange rates and whether you’ll pass back some employer National Insurance savings to staff via extra pension contributions.
- Contractual change and communication: Salary sacrifice requires a contractual change. Provide clear employee communications, examples, and an opt-out route; many providers offer ready-made guides, calculators and templates.
- Statutory pay checks: Build pre- and post-change checks into payroll to protect National Minimum Wage/National Living Wage compliance and assess impacts on statutory payments for vulnerable groups.
- Payroll and HR data: Maintain both “post-sacrifice pay” (for payroll) and a “reference salary” (for HR/benefit purposes) where needed.
- Review and monitor: Revisit settings at least annually or when pay or legislation changes.
Is it right for your workforce?
For many employers, salary sacrifice is a cost-effective way to enhance pension outcomes without increasing overall spend. Used thoughtfully - with strong communications and safeguards - it can reduce payroll costs, boost employee take-home pay or contributions, and support a stronger benefits story.
Example
| Salary | £35,000 |
| Contribution | £1,750 |
A) Without salary sacrifice (relief-at-source)
| Employee contribution | £1,400 from take-home pay |
| Employer contribution (via basic-rate tax relief) | £350 |
| Employee NI | Unchanged (still calculated on full £35,000) |
| Employer NI | Unchanged |
| Net cost to employee | £1,400 per year / £116.67 per month |
| Gross into pension | £1,750 per year |
B) With salary sacrifice (salary exchange)
| Contractual salary | Reduced by £1,750 to £33,250 |
| Employer contribution | £1,750 |
| Income Tax saving | £350 (20% of £1,750) |
| Employee NI saving | £140 (8% of £1,750) |
| Net cost cost to employee | £1,260 per year / £105 per month (£1,750 - £350 -£140) |
| Gross into pension | £1,750 per year |
| Employer NI saving | £262.50 per year (15% of £1,750) |
Are you considering a salary sacrifice scheme?
Salary sacrifice schemes are a cost-effective and mutually beneficial arrangement that offer employees the chance to increase their retirement savings whilst they and their employer both make National Insurance savings; however, due to the complex nature of these arrangements, they require professional advice from a specialist.
To discuss salary sacrifice, or other elements of your existing workplace pension arrangements, get in touch today.
Important information
This document provides general guidance on salary sacrifice for workplace pensions. It is not a substitute for legal, tax, or HR advice and should not be relied upon as such. Employers should obtain independent employment-law advice before making contractual changes and ensure compliance with National Minimum/Living Wage rules, statutory pay calculations, and benefit/insurance definitions (e.g., “reference salary”). The content reflects UK legislation and HMRC guidance current at 10 November 2025 and may change; future updates may alter the implications described.
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