Salary sacrifice for pensions explained

Using salary sacrifice to fund your pension could increase the amount you save for your retirement and reduce how much National Insurance you pay

Salary Sacrifice 1920X1080 Jul 22
Bertrand Pole
Published: 18 Jul 2022 Updated: 26 Jul 2022

Salary sacrifice is an extremely useful way of saving for your retirement and reducing the amount of National Insurance you and your employer pay. Unfortunately, not everyone is aware of these benefits so they do not take advantage of this option. In this article, we explain what salary sacrifice is in relation to making pension contributions, what the benefits are and what you need to be aware of before you agree to sacrifice your salary.

What is salary sacrifice?

Using a salary sacrifice arrangement is a very efficient way to contribute to your pension. You enter into an agreement with your employer where you exchange (or ‘sacrifice’) part of your salary and in return your employer makes a direct contribution into your pension.

What are the benefits of salary sacrifice?

The main benefit of salary sacrifice is that both you and your employer save on National Insurance. Employer National Insurance is charged at 15.05% and class 1 employee National Insurance has increased by 1.25% on top of the current rate of 13.25% for income between the lower and upper earnings limit (£1,048.01 to £4,189 a month). It then drops to 3.25%. Any reduction to this is welcomed by most people.

Many employers pass on their National Insurance saving to you via your pension, which increases the amount saved without personally contributing another penny. The investments held within your pension will continue to grow free from capital gains tax and income tax.

In Scotland, the rules surrounding salary sacrifice are the same as the rest of the UK, but as the rates of Scottish income tax are slightly higher, you will find you have a higher tax saving if you enter into a salary sacrifice agreement.

Who is eligible to take part in a salary sacrifice scheme?

Salary sacrifice is generally only available to employees if it is offered by their employer. Employers are not required to offer salary sacrifice to their employees as standard, although many of them do.

Salary sacrifice is not available if you are self-employed unless you are a company director of your own limited company and pay yourself dividends. Personal pension contributions are not usually an option in this situation and you can only make employer pension contributions. Therefore, you can direct employer contributions instead of personal contributions into your pension.

What is the maximum amount of my salary that can be sacrificed?

There isn’t a set maximum figure or percentage of your salary that can be sacrificed, but there are limits. You cannot sacrifice so much of your salary that it reduces it below the limit for the minimum wage and sacrificing more than your pension annual allowance limit could trigger a tax charge.


Can I salary sacrifice my bonus?

As a bonus is considered as salary, there is no reason it cannot be sacrificed in the same way and benefit from the same pension tax relief. Salary sacrificing a bonus is a popular option as it also reduces the National Insurance payable on the benefit. It also reduces your employer’s National Insurance liability on the lump sum and in many cases, they will pass on this saving directly to your pension.

What do I need to be aware of before I choose salary sacrifice?

Reducing your salary could mean that you cannot borrow as much for a mortgage, as this amount is based on multiples of your salary (although many lenders take salary sacrifice into consideration). The other issue is that the level of certain state benefits you may be entitled to could be reduced. It’s also important to bear in mind that salary sacrifice could reduce the amount of any income protection benefit or maternity pay you receive, but many employers will base these benefits and payments on your pre-sacrificed income level. It’s really important to check these details with your employer before you enter into a salary sacrifice agreement.

Please also bear in mind that any salary sacrifice that commenced after 8 July 2015 will still be taken into account when measuring threshold income when carrying out an annual allowance tapering calculation.

Salary sacrifice – an example scenario

John and Sam both earn £80,000 per annum. John makes a personal contribution of £10,000 into his workplace pension scheme through a net pay arrangement. His employer contributes an additional 3% (£2,400) per annum.

Sam contributes the same amount to his pension using salary sacrifice. His employer adds their National Insurance contribution of 15.05% (£12,400) into his pension along with their rebate of £1,505.

  John Sam Difference
Gross earnings £80,000 £70,000 £10,000
Less personal pension contribution £10,000 Nil  £10,000
Less tax and employee National Insurance £21,481 £21,156 £325
Net income £48,519 £48,844 £325

Total pension contributions:

Personal £10,000 Nil £10,000
Employer £2,400 £12,400 £10,000
Employer National Insurance rebate Nil £1,505 £1,505
Total £12,400 £13,905 £1,505

By using salary sacrifice to fund his pension, Sam saves £325 in tax and National Insurance which is added to his net income and contributes an additional £1,505 to his pension each year.

Talk to Evelyn Partners about how salary sacrifice could benefit your pension

If you have any questions about salary sacrifice, pensions and retirement planning or would like to discuss investing a lump sum from a bonus, our experts can help. Book an initial consultation online or call us on 020 7189 2400.

Tax legislation

Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.

Ref: 22078199