UK: Benefits of Using Pensions Salary Sacrifice
What is Salary Sacrifice?
An employee agrees with their employer to reduce their gross salary or bonus in exchange for the employer making a payment of the same amount, into the employee’s pension scheme.
What are the Benefits to Employers?
Employers can save on National Insurance Contribution (NIC) payments as the pension contribution is disregarded when calculating the earnings related NIC.
While it was always a valuable option, it has potentially become even more so given the UK Government’s increase in employer NIC to 15%, and the reduction of the level at which employers start paying NICs from £9,100 to £5,000, both changes coming into effect on April 6th 2025.
What are the Benefits to Employees?
The amount of the salary sacrifice can result in income tax and NIC savings by the employee as the pension payment is not subject to income tax or NIC. Meanwhile, they increase their pension pot.
What is Required to Implement Salary Sacrifice?
The arrangement involves a formal variation of the employee’s employment contract, in compliance with Tax Authority (HMRC) requirements. The employee exchanges contractual rights to an amount of gross salary or bonus in return for the equivalent employer pension contribution.
How can we help?
Our team has helped many employers manage their NIC liabilities by setting up salary sacrifice pension arrangements, ensuring the arrangements meet HMRC’s requirements. This covers:
- all necessary documents to effect the salary sacrifice arrangement;
- contractual variations to employment contracts to ensure compliance with HMRC’s requirements; and
- suitable communications to employees and FAQs.
 This is a high level general update only. Legal advice should be obtained on specific circumstances.
