What is pension salary sacrifice and how does it work?
A pension salary sacrifice arrangement allows employees to exchange part of their gross salary for an increased employer pension contribution.
Because employer pension contributions are exempt from National Insurance Contributions (NICs), both the employer and the employee make NIC savings.
The employee’s overall pension saving remains the same (or may increase if the employer passes on some of their NIC saving), making this a cost-effective way to support long-term financial wellbeing.
How do employers benefit by offering pension salary sacrifice to employees?
For employers, the main advantage is the NIC saving, which can be significant depending on workforce size and uptake.
Some businesses choose to reinvest part or all of this saving into employee pension pots, while others use the saving to support wider business costs. Both approaches are acceptable as long as they’re communicated clearly.
Salary sacrifice can also:
- enhance your employee benefits package
- support staff retention
- demonstrate a commitment to employee financial wellbeing.
What should employers consider before offering pension salary sacrifice
Before implementing a pension salary sacrifice arrangement, it’s important to understand the practical and compliance-related requirements, such as:
- National Minimum Wage compliance: Salary sacrifice must not reduce an employee’s pay below the statutory minimum. Employers must carry out checks before enrolling staff into the scheme.
- Additional payroll and admin responsibilities: Salary sacrifice requires updates to payroll systems, employee contracts and internal processes. Proper implementation is essential to remain compliant.
- Interaction with auto-enrolment duties: Employers must continue to meet auto-enrolment responsibilities, including assessing employees and ensuring pension contributions meet or exceed statutory minimums.
- Impact on statutory and earnings-based payments: Because salary is reduced contractually, earnings-related payments such as bonuses, statutory sick pay or maternity pay may be affected. Employees need to be fully informed before joining the scheme.
- Upcoming cap on NIC savings from April 2029: As announced in the Autumn Budget on 27th November 2025, from 6th April 2029 the National Insurance exemption on pension contributions made through salary sacrifice will be capped at £2,000 per employee per year. Any contributions above this limit will attract the usual employer and employee NICs, so employers may wish to review how this change affects the long-term value of operating a salary sacrifice scheme
What do employees need to know when implementing pension salary sacrifice?
For salary sacrifice to work effectively, it is essential for employers to communication effectively with employees, ensuring they understand:
- how their salary will change
- how their pension contributions will be shown
- what happens to statutory payments or bonus calculations
- that their total pension saving will remain the same (or increase if you enhance it)
Well-executed communication builds trust, increases participation, and reduces follow-up queries once the scheme is running.
How to ensure your salary sacrifice scheme meets HMRC requirements
For a salary sacrifice arrangement to be recognised as valid by HMRC, it must be properly documented and reflected in updated employee contracts.
HMRC does not allow retrospective corrections, so getting the structure right from the outset is crucial.
LWA are here to help answer any questions about offering pension contributions through a salary sacrifice scheme
If you’re considering introducing a salary sacrifice arrangement, or want to check if your existing scheme is compliant and effective, our team at LWA can support you through the process, including supporting you with HMRC communications. Please call our Corporate Tax team on 0161 905 1801 in our Manchester office, or 01925 830 830 for our Warrington office.