Salary sacrifice is one of the most efficient ways to fund a workplace pension in the UK. The mechanism is simple: an employee gives up part of their gross salary in exchange for an equivalent employer pension contribution. Because the sacrificed amount never counts as salary, neither party pays National Insurance on it — producing real, recurring savings on both sides of the payslip.
With Employer NIC rising to 15% from April 2025 and the secondary threshold falling to £5,000, salary sacrifice has become materially more valuable. This article walks through exactly what you save, what the restrictions are, and how to set it up without falling foul of HMRC.
The mechanics: who saves what
Imagine an employee earning £50,000 a year who currently contributes 5% (£2,500) into the workplace pension via net pay or relief at source. If that £2,500 is restructured as a salary sacrifice:
- Their gross salary drops to £47,500.
- The employer pays £2,500 directly into the pension as an employer contribution.
- The employee saves 8% Employee NIC on £2,500 = £200.
- The employer saves 15% Employer NIC on £2,500 = £375.
- Income tax position is unchanged — the £2,500 was already pre-tax under most pension reliefs.
That is £575 of pure cash saving every year on a single £2,500 contribution. Scale it across a workforce and the numbers become significant.
What employers commonly do with the saving
Three patterns dominate. Some employers keep the full 15% NIC saving as a cost reduction. Others share it with the employee — often by passing on half of the employer saving as an additional pension contribution, which is genuinely tax-free for the employee. A minority pass on the entire saving, which makes the scheme highly attractive to recruit against but reduces the financial case for the employer.
The restrictions you must respect
Salary sacrifice is a contractual variation, not an HMRC scheme, so the rules sit in employment law as much as in tax. Key constraints:
- Cannot push pay below National Minimum Wage. An employee on or near NMW cannot sacrifice salary into a pension. HMRC enforces this strictly.
- Must be a genuine contractual change. A simple deduction is not enough — the employment contract must be amended to reflect the reduced salary.
- Affects "notional pay" for benefits. Statutory sick pay, statutory maternity pay, mortgage applications, and life cover are sometimes calculated on reduced salary. Most providers and lenders now treat reference pay sensibly, but it must be checked.
- Cannot reduce auto-enrolment contributions. The employer's 3% statutory minimum must still be funded on top of the sacrificed amount unless the scheme is specifically designed to combine them.
What is allowed and what is not
Pension contributions, cycle-to-work, ultra-low-emission company cars, and additional annual leave are the main categories where salary sacrifice still delivers tax advantages. Most other "perks" (gym, mobile phones, dental cover) became taxable Optional Remuneration Arrangements (OpRA) after April 2017 — the sacrifice continues but the tax saving disappears.
How to set it up properly
You need a written variation of contract for each participating employee, a clear policy document, payroll software configured to apply the sacrifice before tax and NIC, and a pension provider that can accept employer contributions tagged correctly for HMRC reporting. Our payroll team sets up salary sacrifice for clients regularly and coordinates with your tax planning advisor on the wider remuneration package.
What to do next
If you employ more than a handful of staff and you have not implemented salary sacrifice, you are leaving four-figure sums on the table every year per employee. To explore whether the numbers work for your business, book a call with PushDigits or get in touch via our contact page.