You might have heard of salary sacrifice (or its less unsettling name, salary exchange) before; you might even have been lucky enough to have this arrangement for your workplace pension, electric vehicle or a cycle to work scheme in a previous job.
When it comes to making contributions to your employees’ pensions, it’s the most tax efficient way, saving both you and your employees money. It’s such a win-win that 85% of very large companies are using a pension salary sacrifice scheme. But for smaller businesses, it can seem difficult to implement. So, in this article, we’ve broken down what you should know if you’re thinking of introducing a salary sacrifice pension arrangement for your employees.
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The positives in a nutshell:
- Pension salary sacrifice means both you and your employees save on National Insurance costs
- This gives your employees a small pay boost each month
- You can choose how to use your employer savings: add to their pension pots, invest in other benefits, or use to offset National Insurance increases
What is pension salary sacrifice?
In a normal pension arrangement, you need to contribute a minimum of 3% of an employee’s qualifying earnings into their workplace pension account, and they make up the rest to a minimum total contribution of 8%.
With salary sacrifice, the employee agrees that the employer will pay the full total contribution on their behalf. In return, they ‘exchange’ or ‘sacrifice’ a portion of their salary equivalent to their usual contribution. The result is that the employee’s pension contribution is paid into the pension account BEFORE National Insurance tax is taken on their salary.
This means that both the employee and employer stop paying National Insurance on the portion of the salary that is the employees’ pension contribution. That’s a saving of 15% of the contribution amount for you as the employer (following the NI increase in April 2025), and 2-8% for the employee depending on their tax bracket.
It’s a simple administrative change that saves both you and your employees money. Any workplace pension scheme can be converted to a salary sacrifice arrangement, so you won’t need to change your provider.
What you need to do to switch over to salary sacrifice
There are five main things you need to do to make sure your switchover is compliant with regulations:
1. Assess your employees for eligibility
It’s important that, when salary is sacrificed, it doesn’t take the headline salary down below National Minimum Wage. You could be fined up to £20,000 per employee and get banned from company directorship for up to 15 years if you don’t comply with the National Minimum Wage. So it’s important to take your employees’ starting salaries into account.
Another thing to take into account is the Lower Earnings Limit. Although this isn’t a legal obligation, if employees don’t meet the threshold over a number of years, they may miss out on their State Pension when they retire. This would be a terrible outcome when the whole point of the workplace pension is to help people prepare for their future! So you should also check if your employees will go under the limit if they opt in.
2. Cap contributions increases
Did you know that for most people, the statutory minimum contributions are around half of what experts say they should contribute to have a good quality of life in retirement? Experts recommend that most people should be saving between 12%-15% of their full salary. So it’s a good idea to let your employees know they can increase their contributions; if they do so, the National Insurance savings generated by salary sacrifice will also go up for both of you. But, you need to bear in mind the thresholds in point 1 (National Minimum Wage and Lower Earnings Limit). You may need to cap their contribution increases to prevent them dipping below these lines
3. Educate your employees
When you switch to a salary sacrifice scheme, you have a statutory duty to educate your employees and gather their informed consent. You will need to explain the concept and present the advantages and possible disadvantages (namely, that those in receipt of statutory benefits like parental pay may lose out by staying in salary sacrifice).
4. Manage opt-ins or opt-outs
You can choose to set up your scheme as an opt-in, where employees agree to the contractual change after being informed about it. Or you can set up your scheme as an opt-out arrangement. We recommend the latter as it usually leads to a much higher conversion rate.
You will need to run and retain proof of a six-week consultation period, plus store payslips from before and after the change and any other correspondence, in case HMRC want to check you’ve set up your scheme in a compliant way.
Whichever you choose, you will need to manage the opt-in and opt-out process. You are required to keep records of employee consent to changes and store these so HMRC can access them if needed.
5. Contract updates
When employees become part of the salary sacrifice scheme, you will need to amend their contracts and keep these updated if their contribution levels or salaries change.
Pension salary sacrifice FAQ
Here are the most commonly asked questions from employers who are considering a pension salary sacrifice scheme:
Do I need to switch pension provider to set up salary sacrifice?
No, you won’t need to switch provider. This administrative change can be made to any pension scheme.
Are there any disadvantages to employees in switching to a salary sacrifice pension?
In general, pension salary sacrifice is a win-win for both you and your employees. Some employees worry that they may face disadvantages when applying for a mortgage. However, most mortgage lenders are well aware of salary sacrifice, as this arrangement is commonly used across large companies. You can usually provide a letter proving their original income if needed.
It’s also worth bearing in mind that this arrangement may disadvantage some employees if you have a Defined Benefit pension scheme, as lowering their salary through sacrifice may ultimately lower their final pension income.
Does pension salary sacrifice affect parental leave?
There are some complexities to salary sacrifice before and during parental leave. It’s important for you to understand how it may impact employees, who may wish to opt out during this period. Additionally, you should be aware of your duties as an employer to keep up pension contributions during parental leave.
How much salary can an employee sacrifice?
Theoretically, there is no limit to the amount an employee can sacrifice. However, you will need to cap some employees’ contributions to make sure they don’t fall below National Minimum Wage. You will also need to take into account any other salary sacrifice schemes they are part of.
Does salary sacrifice increase take home pay?
Although some employers arrange their salary sacrifice scheme to add to the employees’ pensions instead of take home pay, Maji’s arrangement boosts their pay cheque by an amount equivalent to their NI saving. I.e. they will take home an extra 8% of their pension contribution (if a lower-rate taxpayer). You could also choose to add some or all of your employer saving to their pension pot in addition.
Is salary sacrifice good for high earners?
Higher-rate taxpayers may get less of a pay boost, as they will only receive 2% of their pension contribution as an extra. However, if they haven’t been claiming their additional pension tax relief, they will receive this automatically in this new arrangement – which will result in a bigger boost. Plus, for some high earners, salary sacrifice can help them bring their pay below certain thresholds such as higher tax or free childcare hours.
Maji can automate pension salary sacrifice for you
There’s a lot to think about when it comes to making the switchover to a salary sacrifice pension arrangement. That’s probably why very large companies, with dedicated HR and pension teams, have been able to take advantage up to now.
But Maji believes more companies should be able to embrace this win-win scheme. Our platform digitises and automates the process, making it easy and engaging for you and your employees to switch while remaining compliant.
Not only this, but we maximise the savings you can make through salary sacrifice by helping your employees increase their pension contributions to the recommended level. And your team will also get access to our host of financial planning and educational tools to increase their financial wellbeing across the board.
We’ll also help your finance team or your accountant ensure your payroll and pension account are set up correctly for salary sacrifice, so that you can start making savings within a month.
We’d love to help you make the switch – contact us and we’ll get you started!
Interested in learning more about salary sacrifice schemes? Access our comprehensive salary sacrifice guide for employers here.
