Salary Sacrifice Pensions Explained

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Salary sacrifice pensions are a tax-efficient win-win. They help employees take home more money while cutting employers’ National Insurance contributions. Here’s how salary sacrifice pensions work, why they matter, and how to set one up with zero hassle.

What is Salary Sacrifice?

New rules coming in 2029: Salary sacrifice National Insurance savings will be capped at £2,000 per year. Employers have a window to maximise savings before the changes take effect.

Salary sacrifice is a government-backed scheme to help employers and their workers save on tax. An employee agrees, with their employer, to give up part of their salary in exchange for non-cash benefits. The benefits are not subject to income tax or National Insurance contributions (NICs), so their taxable salary is reduced.

What is a Salary Sacrifice Pension?

A salary sacrifice pension is a tax-efficient way to contribute to a workplace pension. Instead of paying into a pension from take-home pay, an employee agrees to reduce their gross salary. The employer then pays the ‘sacrificed’ earnings straight into employees’ workplace pensions. The result is:

• Employees take home more pay after tax
• Employers pay less in National Insurance Contributions (NICs)

It’s one of the most tax-efficient ways to save for retirement.

How Does Salary Sacrifice Work?

Let’s say an employee earns £50,000 a year. They choose to sacrifice £2,500 (5%) into their pension.

• Their official salary becomes £47,500
• The £2,500 goes straight into their pension (paid by the employer)
• Their taxable income is reduced so they pay less income tax and NICs
• Their take-home pay increases
• The employer saves on their own NICs too

Simple. Smart. Tax-efficient.

Salary Sacrifice: A Real Example

Here's an example of how a salary sacrifice scheme works for an employee who earns £50,000 a year.

Before salary sacrifice:

• Employee earns £50,000.
• 5% employee contribution: £2,500.
• 3% employer contribution: £1,500.
• Total pension contribution: £4,000.
• Employee tax: £9,980.40.
• Net pay: £37,519.60.
• Employer NICs: £5,644.20.

After salary sacrifice:

• Employee salary: £47,500.
• Sacrifice amount: £2,500.
• Employer contributes the full £4,000.
• Employee tax: £9,780.40.
• Net pay: £37,719.60 ↑
• Employer NICs: £5,299.20 ↓

Employees gain £200. Employers save £345. Everyone wins.

Employer National Insurance Savings

The savings scale up with employee headcount and can help businesses save money on their employers’ National Insurance contributions.

If each employee sacrifices 5% (the legal auto-enrolment minimum) of a £50,000 salary:

• 50 employees = £17,250 saved per year
• 100 employees = £34,500 saved per year
• 250 employees = £86,250 saved per year

Want to see your numbers? Use our free salary sacrifice calculator to see how much your business could save on employer National Insurance contributions.

Upcoming Changes: The 2029 Salary Sacrifice Cap

The government has announced changes to how salary sacrifice pensions will work from April 2029.

Under current rules, pension contributions made through salary sacrifice are free from both income tax and National Insurance contributions (NICs). But from 6th April 2029, the National Insurance exemption will be capped at £2,000 per year for employee contributions made through salary sacrifice. This means:

• The first £2,000 per year of salary sacrifice pension contributions will still be free from National Insurance.
• Any contributions above £2,000 will be subject to National Insurance for both the employee and employer.
• Income tax relief will still apply to pension contributions as normal.

What This Means for Employers and Employees

Salary sacrifice will still be a valuable way to contribute to pensions — but the National Insurance savings may be smaller for higher contributions after 2029.

For many businesses and employees, this creates a clear window of opportunity. Between now and April 2029, salary sacrifice continues to deliver its full National Insurance advantages, helping employers reduce costs and employees increase take-home pay. Businesses that implement salary sacrifice now can:

• Maximise National Insurance savings under the current rules
• Help employees boost pension contributions while the full benefit is available
• Build stronger long-term financial wellbeing benefits for their team

Because of this upcoming change, many employers are reviewing their pension setup and considering whether now is the right time to introduce salary sacrifice.

Want to see how much your business could save before the 2029 changes? Try our salary sacrifice calculator.

Why Employers Love Salary Sacrifice Pensions

Lower costs, happier team, stronger brand. Here’s what makes salary sacrifice such a powerful benefit for employers.

• Reduced National Insurance contributions: By reducing taxable income, employers are required to pay less in National Insurance contributions. Employers can choose to strengthen the company’s net profits or reinvest the money they’ve saved back into the business.
• Attract and retain the best talent: A salary sacrifice pension is an important part of a strong benefits package. In a competitive job market, boosting take home pay or pension contributions is key to recruiting and retaining high performing employees.
• Positive company image: Offering a salary sacrifice pension demonstrates an employer’s commitment to the financial well-being of their employees. This can result in positive reviews on platforms such as Glassdoor and LinkedIn.

Why Employees Love It Too

Offering a salary sacrifice pension is one of the easiest ways for employees to get more from their pay packet.

• Increased take home pay. Employees will see an increase in their take-home pay due to the tax savings from lower National Insurance contributions.
• Greater pension contributions. Employees can choose to add their additional take-home pay to their pension pot. Employers may choose to add their National Insurance savings to their employees’ pensions.

There’s no extra effort or extra cost – it’s simply a smarter way to save.

Any Downsides?

Salary sacrifice can have an impact on anything that is linked to an employee’s salary. Here are a few things that may affect your decision to switch to a salary sacrifice scheme.

• Restrictions on low income earners. Employers aren't able to use salary sacrifice when it would reduce an employee’s earnings under the national minimum wage.
• Effects on salary-based benefits. Salary sacrifice can affect employees’ entitlement to earnings-related benefits. This includes things like life insurance or loan applications. Typically, this can be resolved by explaining the situation to the lender.
• Potential maternity pay reduction. Typically, statutory maternity pay is calculated based on average weekly earnings, so it could be reduced if your overall salary is reduced.

How to Set Up a Salary Sacrifice Pension

Setting up a salary sacrifice pension can be straightforward if your existing provider already provides the option:

• First, employers should contact their payroll or pension provider. Employers should make sure they can facilitate salary sacrifice within their workplace pension scheme.
• Employers will need employees’ permission before entering them into a salary sacrifice scheme. Employees will need to agree to the change in their contract or through an agreement letter.
• Manage opt-outs for employees who don’t agree to salary sacrifice. Employers will need to pay these employees’ pension contributions as previously set up.

If the company’s existing pension scheme does not offer pensions with salary sacrifice, there are a few options.

• Speak to a pension specialist such as a Financial Adviser or an accountancy firm. This is a common route for employers to get straight-talking advice from an expert.
• Contact another pension provider. Many workplace pension providers offer salary sacrifice consultations as part of their service. There's often a fee for this service, however Penfold’s workplace pension includes free salary sacrifice consultation and implementation.

Let Penfold Handle It All – Free

Penfold’s modern workplace pension includes free salary sacrifice consultation and setup:

• We review your scheme and payroll setup
• Walk you through compliance and documentation
• Handle onboarding and admin for your team

No paperwork nightmares. No hidden costs.

Book a free consultation or read more about our salary sacrifice pension.