Employers Salary sacrifice arrangements

Salary sacrifice is a tax-efficient way to arrange contributions to your workplace pension. It enables you and your workers to pay lower National Insurance contributions. The National Insurance savings can be significant for employers.

Salary sacrifice explained

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How salary sacrifice works

Workers agree to give up (sacrifice) part of their salary in return for pension contributions. As the employer, you reduce your workers’ salary by the amount of their pension contributions.

You then pay an amount equal to their pension contributions, plus your contributions, to their workplace pension savings. You and your workers save money, because you pay less National Insurance on the lower salaries.

You can use salary sacrifice from the beginning, or introduce it at a later date.

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Ways to use the savings

You can set up your salary sacrifice arrangement so that:

  • your workers receive the National Insurance saving with their pay – making their net pay a little higher – or
  •  the National Insurance saving goes into their pension, giving them a larger pension contribution for the same amount of money.

Some employers also put some or all the money they’ve saved on National Insurance into their pension scheme. You may want to consider this as an incentive for workers to stay in your workplace pension.

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Recording contributions

We treat all contributions paid to us through a salary sacrifice arrangement as ‘employer only’.

This means you’ll need to list salary sacrifice contributions on behalf of your workers in the Employer Contribution column of your pension data file, along with your own employer contributions.

If you think you’ve made a mistake calculating contributions, contact The Pensions Regulator for guidance.

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Fluctuating earnings

If your workers have fluctuating earnings, their pay could change a lot from one pay period to another. So there may be times when you can’t collect the usual amount to be paid from your workers’ salaries. 

However, you’re still required to pay the minimum contribution to the workplace pension on your workers’ behalf, through the salary sacrifice arrangement.

Salary sacrifice and earnings-related payments

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You may decide to calculate earnings-related payments, such as pay rises and overtime rates and pay rises, on:

  • the pre-sacrifice ‘notional’ salary, or
  • the reduced post-sacrifice salary.

You’ll need to tell your workers which one you use.

You’ll also need to decide whether you use notional salary or post-sacrifice salary when giving workers a salary figure to quote for a mortgage or loan.

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Salary sacrifice is a contractual agreement

Salary sacrifice involves a change to your worker’s contract of employment.

When you set up a salary sacrifice arrangement, your existing workers will need to agree to this. You can set up your salary sacrifice arrangement so workers can opt in or out, agreeing the change to their contract of employment each time, if there’s a significant change to their lifestyle affecting their financial situation (such as marriage, divorce, bereavement, birth or adoption).

Remember, salary sacrifice is covered by employment law, not tax or pension law. You may need to take specialist advice if you’re changing employment contracts.

Safeguards for workers

You’ll need to make sure your workers are aware that salary sacrifice could affect their entitlement to the following types of State benefits.

  • Earnings-related benefits, including means-tested benefits and statutory benefits such as sick pay. Workers could qualify for a reduced benefit, or even lose the benefit altogether if their earnings go below the government’s lower earnings limit because of salary sacrifice.
  • Contribution-based benefits such as State Pension. Workers will be paying lower National Insurance contributions, so could build up a lower amount of State Pension.

You may consider not including some workers in your salary sacrifice arrangement if it would make them worse off financially.

You can’t include workers in a salary sacrifice arrangement if it would take their earnings below the National Minimum Wage. You’ll need to have a system in place for checking this.

Frequently asked questions

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Salary sacrifice is a tax-efficient way to arrange contributions to your workplace pension. It enables you to pay lower National Insurance contributions. Your workplace also saves on National Insurance.

You agree to reduce your salary by the same amount you pay in to your pension savings. Your workplace pays this money in for you, together with their own payments. This means:

  • you pay less income tax, and
  • you and your workplace both save on National Insurance contributions.

Not all workplaces offer salary sacrifice but if your workplace does, you might want to consider it (if you have the choice). You might also see it called ‘salary exchange’. 

How does salary sacrifice work?  

  • You agree with your workplace that you’ll give up (sacrifice) an amount of your salary equal to the amount you pay into your pension savings.  
  • Your workplace pays this amount into your pension savings for you. Then they add their own payment.  
  • So the same amount goes into your pension savings as if you were paying it.  
  • But, because your salary’s lower, you pay less tax and National Insurance. Your workplace also pays less National Insurance. 
  • So your take-home pay can be a little higher.  
  • Some workplaces pay their National Insurance savings into the pension, helping to build up your pension savings.  

If your workplace offers salary sacrifice, they’ll be able to explain more about how it works.