With rising employment costs, ongoing pressure on household finances, and increasing focus on employee financial wellbeing, many organisations are reviewing how their benefits package can deliver greater value.
One option continuing to gain attention is salary sacrifice.
For employers, salary sacrifice can improve the value of workplace benefits while helping reduce National Insurance costs. For employees, it can create a more tax-efficient way to contribute towards long-term financial goals such as retirement savings.
What is salary sacrifice?
Salary sacrifice is an arrangement where an employee agrees to give up part of their gross salary in exchange for a non-cash benefit provided by their employer.
The most common example is a salary sacrifice pension arrangement, sometimes referred to as pension salary sacrifice or salary exchange.
Instead of the employee paying pension contributions from their salary after National Insurance deductions, the employer pays the contribution directly into the workplace pension scheme. In exchange, the employee’s contractual salary is reduced by the same amount.
Because the employee’s gross pay is lower:
- Employees typically pay less National Insurance
- Employers usually reduce their National Insurance liability
- Pension contributions can become more tax efficient
Salary sacrifice can also apply to other benefits, including:
- Electric vehicle schemes
- Cycle to Work schemes
- Workplace technology schemes
- Holiday trading arrangements
- Workplace nursery schemes
- Additional pension contributions
What are the benefits of salary sacrifice for employees?
Lower National Insurance contributions
For the 2026/27 tax year, most employees pay National Insurance at 8% on earnings between £12,570 and £50,270.
Due to the employee’s contractual salary being lower, National Insurance is calculated on a reduced amount.
This can increase take-home pay while maintaining the same pension contribution level.
Tax-efficient pension contributions
Salary sacrifice pension arrangements can provide a straightforward and tax-efficient way to save for retirement.
For many employees, this can improve the value of pension saving without requiring additional contributions.
Potentially higher pension contributions
Some employers share employer National Insurance savings with employees by adding extra pension contributions.
This can help employees build larger retirement savings over time.
Greater awareness of long-term financial planning
Salary sacrifice conversations often encourage employees to think more actively about pensions, retirement goals, and long-term financial wellbeing. This can support wider financial education initiatives across the organisation.
What are the disadvantages of salary sacrifice?
While salary sacrifice can provide meaningful benefits, there are important considerations for both employers and employees.
Impact on statutory benefits
Reducing contractual salary may affect calculations linked to earnings, including:
- Statutory maternity pay
- Statutory paternity pay
- Statutory sick pay
- Redundancy pay
- Mortgage borrowing assessments
- Life assurance multiples
Employers should carefully assess how salary sacrifice may impact employees differently across the workforce.
National Minimum Wage considerations
Salary sacrifice cannot reduce pay below the National Minimum Wage or National Living Wage. From April 2026, the National Living Wage is £12.71 per hour. This means some employees may not be eligible to participate.
Employee understanding and communication
Salary sacrifice can feel confusing if not communicated clearly. Employees may misunderstand how contributions work, worry about reductions in salary, or be unsure about the impact on other benefits.
Strong communication is essential.
This includes:
- Clear examples
- Frequently asked questions
- Payroll guidance
- Pension education
- Access to financial wellbeing support
Payroll and administration complexity
Introducing pension salary sacrifice requires coordination across payroll, HR, pensions, and benefits providers.
Employers should ensure systems and processes are properly configured before launch.
Salary sacrifice and auto-enrolment
Salary sacrifice can work alongside automatic enrolment requirements.
However, employers must continue to meet minimum pension contribution obligations and ensure employees receive the appropriate statutory communications.
It is also important that salary sacrifice arrangements are formally documented through contractual agreement.
Employers should seek professional guidance when designing or reviewing salary sacrifice arrangements to ensure compliance with pension and employment legislation.
How Secondsight can help
At Secondsight, we help employers design employee benefits strategies that create meaningful outcomes for both businesses and employees.
From workplace pensions and salary sacrifice to financial education and benefits communication, we work with organisations to improve engagement, support financial wellbeing, and maximise the value of employee benefits.
Whether you are reviewing an existing pension salary sacrifice arrangement or considering implementation for the first time, our team can help you understand the opportunities, risks, and communication requirements involved.
FAQs
Potentially, some lenders assess borrowing based on contractual salary. Employees may need confirmation of pre-sacrifice salary from employers.
Not always, employees cannot reduce pay below National Minimum Wage thresholds.
For many employers and employees, pension salary sacrifice continues to provide valuable National Insurance savings and pension efficiency benefits.
For pension contributions, salary sacrifice achieves the same income tax relief as a standard net pay arrangement, but its unique benefit is that it additionally reduces National Insurance contributions for both the worker and the employer. For other non-cash perks (like technology), tax depends on whether the item is classified as a Benefit in Kind.
Salary sacrifice rules have evolved over the past decade.
Following changes introduced by the government, some salary sacrifice benefits no longer receive the same tax advantages they once did.
However, pension salary sacrifice continues to remain one of the most tax-efficient and widely used arrangements available.
In 2026, pension salary sacrifice remains a popular option for employers looking to improve pension engagement, support employee financial wellbeing, and reduce employment costs.
As always, tax treatment depends on individual circumstances and legislation may change in the future.
Yes, while a salary sacrifice agreement represents a formal alteration to an employment contract, it typically includes provisions allowing employees to opt out or alter their arrangement if they experience a significant “life event,” such as a change in marital status, pregnancy, or a significant change in financial circumstances.
Salary sacrifice can be used to meet your auto-enrolment duties, provided the qualifying earnings calculations and total contribution levels remain fully compliant with statutory minimums, and the arrangement is correctly set up as an employer-funded contribution.
Please note:
This article is for general information only and does not constitute advice.
All information is correct at the time of writing and is subject to change in the future. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, trusts, Lasting Powers of Attorney, or will writing.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
