What is salary sacrifice?
Salary sacrifice (also known as salary exchange) is a government backed arrangement that allows both the employer and their employees to save on the tax they pay.
An employee agrees to reduce their salary by an amount equal to their pension contribution. In exchange, the employer agrees to pay the exchanged amount as an additional employer pension contribution.
Because their salary is being exchanged their gross salary is reduced, meaning both the employer and employee don’t pay National Insurance contributions on the amount exchanged.
What are the benefits?
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For employers – you could...
- Pay less in employer's National Insurance contributions (NICs)
- Pass the savings on to your employees as additional pension contributions
- Retain the savings to facilitate the purchase of additional employee benefits
- Reinvest the money you’ve saved back into your business,
- OR a combination of the above
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For employees – they could...
- Pay less in National Insurance Contributions (NIC) and Income Tax (as their taxable income is reduced)
- Increase the level of contribution to their pension pot with no impact on their take-home pay.
- Or keep the same level of pension contribution while increasing their take-home pay.
- For employees who qualify for a financial bonus at work, salary sacrifice can apply to bonus payments, too.
What are the tax savings?
Employer savings
| Salary sacrificed by the employee(s) | Employer NIC rate | Employer's yearly NIC savings | |
| 1 scheme member | £1,500 | 15% | £225 |
| 50 scheme members | £75,000 | 15% | £11,250 |
| 500 scheme members | £750,000 | 15% | £112,500 |
The figures we've shown are based on:
- The 2025/26 tax year rates
- An employee's pensionable pay of £30,000 a year
- A contribution rate of 5%
Employee savings
If an employee earned £30,000 a year and chose to exchange £1,500 (5%) into their pension, this would mean:
- Their salary changes to £28,500 a year
- Their employer pays £1,500 into their pension
- They pay less income tax and NIC as they've a lower taxable salary
- Their take-home pay goes up
Calculator
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Use our salary sacrifice pension calculator
Discover the savings you and your employees can make.
What you need to know
Salary sacrifice isn’t always suitable for everyone. You should consider the following:
- Salary sacrifice might lower the amount employees can borrow on loans and mortgages linked to actual salary received.
- An employee’s entitlement to state benefits eg Statutory Maternity Pay, Statutory Paternity Pay and the State Pension may be affected if their salary falls below the level at which they pay NIC
- Salary sacrifice can only be offered to employees if it doesn’t reduce their salary to below the National Minimum Wage which is £12.21 an hour (as of 1 April 2025)
- If you’re thinking of using salary sacrifice, you should speak to a financial advisor and seek specialist employment advice.
In the Autumn 2025 budget it was announced that from April 2029, National Insurance savings on salary-sacrificed pension contributions will be limited to £2,000 annually.