What is salary sacrifice and how does it save me money?
Watch our handy short explainer video or read on below to find out.
Pensions for employers
Pensions can be a daunting topic for employers. As one of the costliest and administrative-heavy parts of employee remuneration, it’s no wonder that most organisations try to leave it relatively untouched and automatic. When auto-enrolment was introduced, most businesses rushed to get a quick, cheap and compliant solution. However, in most cases, auto-enrolment isn’t the best option for pensions. In this article, we outline Salary Sacrifice and how it works to save employers and employees money.
What is Salary Sacrifice?
Salary Sacrifice is an agreement between you and your employees. Employees can give up part of their future gross salary or bonus in return for a non-cash benefit, like a pension contribution.
With the reduction of cash pay, both employers and employees can save on National Insurance (NI) contributions and income tax, becoming more tax-efficient. The NI and tax savings can then be used to boost pension pots and increase their value over time. Ultimately, this system allows employees to make the same amount of contributions for a lower cost, or a higher level of contributions for the same overall cost.
It really is a win-win, which is why, according to Willis Towers Watson, 86% of the FTSE 350 use it.
Why should employers use this scheme?
You probably already know this, but there’s a lot of money going into National Insurance Contributions. The higher the salary of your employee, the more you have to pay. Even if your employee’s earnings are not too costly, those numbers quickly add up as your team expands.
In return for accepting a lower salary, the employee no longer makes their own contributions into the pension scheme. Instead, the employer makes contributions into the scheme that are equal to the amount of the contributions that the employee was previously making of which is not subject to NICs. As you can see, although it’s called salary sacrifice, it’s really just exchanging the pension they are already contributing for lower pre-tax pay.
Ultimately, reducing overall salaries across a large workforce can achieve substantial savings. Employers can save up to 13.8% of the amount paid by the employee to their pension. Let’s look at that in numbers:

Note: Above is based on average earnings of £29,588.
Implementing Salary Sacrifice can also generate a more attractive benefit package for employees. With the majority of the workforce now considered Millennials, workplace perks and an emphasis on work/life balance through benefits is becoming more important than ever.
The tax-free benefits include:
- Employer-provided pensions advice
- Workplace nurseries
- Childcare vouchers and directly contracted employer-provided childcare that started on or before 4 October 2018
- Bicycles and cycling safety equipment (including cycle to work)
- Season ticket loans
The best thing about these tax-free benefits is that they save you money too! Exactly like the pension, the more the employee uses these benefits, the more money you save. You can also choose to reinvest part of the company’s NI savings back into your team – increasing their wellbeing budget, adopting new tech, creating work from home stipends…there are loads of exciting schemes to choose from.
This sounds too good to be true. Why would employees opt into this scheme?
Employees might be weary at first to agree on a salary reduction. However, the benefit received as a result of the sacrifice and the reduction in salary will easily cancel each other out.
Not only do employers pay less NICs, but so do employees – they also pay less income tax. This means they can save up to 12% of the amount they pay into their pension as a personal contribution:

Note: Calculations based on an employee with pensionable earnings of £2,000 per month, contributing 5% of their earnings, while the employer contributes 3%.
Furthermore, reducing salaries can also help employees in specific circumstances. Employees that earn just over the £50,000 threshold can cut their wages to less than that amount so as to continue to receive benefits from the government, like child benefits. Salary sacrifice can also help members of your team looking to delay repaying student loans.
Ultimately, employees just need to be kept well-informed about all aspects of salary sacrifice and how it will impact their before and after implementation.
