Your business and your employees could be missing out on thousands in National Insurance relief.
Are you and your employees overpaying HMRC? If you run your workplace pension through one of the UK’s biggest providers, the answer’s probably yes.
Why? Most schemes still use relief at source, or a net pay arrangement by default. But salary sacrifice does the same job, with the same provider – it just costs your business less. A lot less.
This blog is for HR and finance leaders who want to know what makes salary sacrifice different – and how much you could be saving.
Relief at source vs net pay vs salary sacrifice: what’s the difference?
There are three types of tax relief arrangements commonly used by UK pension providers. The one you’re on was probably decided the day your scheme was opened.
Relief at source
If you’re on a relief at source arrangement, your pension contributions are taken from employee salaries after Tax and National Insurance has been calculated.
Your provider then claims back 20% basic tax relief from HMRC for every employee, and adds it to their pot.
That’s good for zero or basic rate taxpayers, but not so great for everyone else. If you’re a higher or additional rate taxpayer, you’re entitled to additional tax relief. But under relief at source, you have to claim that back yourself via HMRC.
Sounds like a lot of effort, right?
So it’s no surprise that in 2023/24 only 28.7% of higher rate taxpayers actually claimed that money back. In fact, it’s estimated that higher rate taxpayers miss out on £97,000 each in unclaimed relief.
Summary:
- Provides automatic basic tax relief for employees
- Higher rate and additional taxpayers need to claim extra relief via self assessment
- No National Insurance savings for employees or employers
Net pay arrangement
In a net pay arrangement scheme, contributions get taken from gross pay before tax, then National Insurance is calculated. That means everyone gets their tax relief automatically, with one exception.
Employees who earn below or around the personal allowance may not receive their tax relief up front. The good news is that since 2024/25, HMRC will get in touch at the end of the tax year and offer these employees their tax relief as a one-off payment. It’s more of a hassle, but at least they get the relief they’ve missed out on.
And just like with relief at source – there’s no National Insurance savings on offer here for anyone.
Summary:
- Higher and additional rate taxpayers get their tax relief automatically through PAYE
- Not great for low earners, who may miss out on some or all tax relief upfront
- No National Insurance savings for employees or employers
Salary sacrifice
In a salary sacrifice arrangement, employees agree to “give up” some of their salary and their employer pays it directly into their pension instead.
Because that money never registers as pay, neither the employee, nor the employer pays National Insurance on it. Employees don’t pay tax on these contributions either, with full relief for higher and additional rate taxpayers.
For employers, those National Insurance savings can really add up. An employer with 100 staff, earning an average of £35,000, each contributing 5% qualifying earnings, can expect to save £21,570 a year. That’s real money for benefits, pay rises, bonuses and more.
Only 32% of UK SMEs currently use salary sacrifice for their pensions (Howden). That’s a lot of money left on the table!
Summary:
- The most tax efficient way to pay your pension
- Employers can save thousands in National Insurance
- Employees automatically save Tax and National Insurance
- Easy to set up, no need to change providers
Stop overpaying HMRC. Use our free calculator to find out what those National Insurance savings look like for your business and your employees.
It only takes 30 seconds. It could be worth tens of thousands.
Which arrangement does your pension provider use by default?
| Relief at source | Net pay arrangement |
| Aegon | Smart Pensions |
| Aviva | Now: Pensions |
| Fidelity | |
| Legal & General | |
| Nest | |
| The People’s Pension | |
| Royal London | |
| Scottish Widows | |
| Standard Life |
Even after the 2029 cap, the savings are still worth it
You’ve probably seen the headlines. From April 2029, the government will cap the National Insurance exemption on salary sacrifice pension contributions.
What’s changing? Only the first £2,000 contributed per employee, per year will be free from National Insurance. Anything above that will be treated like an ordinary contribution and NI will be applied at the normal rate.
It sounds like a big deal, but most people won’t notice any difference.
For an employee earning £35,000, contributing 5% qualifying earnings, their contributions sit comfortably under that £2,000 line. The cap changes nothing.
If you’re an employer with 100 employees in the same boat, you still save £21,570 a year in NI.
So there’s still savings, and they’re still absolutely worth it. Don’t let the cap put you off. Don’t leave all that money on the table.
Keep your provider. Start saving money.
Salary sacrifice usually works with your existing provider. Our team can help you make the change quickly, without any hassle.
Want to know how pension salary sacrifice could work for your company? Book a call with one of our benefits experts to check if you’re eligible.
