Salary Sacrifice into Pensions: What’s not to like?

Changes to the rate of UK employers’ National Insurance from 13.8% to 15% from 6 April 2025 may prompt employers who have not already done so to consider implementing salary sacrifice arrangements, particularly in relation to registered pension plans.

What is pension salary sacrifice?

In exchange for a reduction in an employee’s gross salary, a company can provide an equivalent non-cash benefit to the employee by way of an enhanced employer contribution into a registered pension plan.

National insurance contributions savings for the employer and employee

The non-cash benefit may allow both the employee and the employer to make savings. The employee will benefit from income tax relief up to their marginal rate as well as save on Class 1 Primary National Insurance contributions (NICs) at 8% for earnings between £1,048 and £4,189 per month and 2% for any excess earnings. The employer will save class on Class 1 Secondary NICs at 15% of earnings above £417 per month per employee.

What about the income tax position?

Ordinarily, employees already receive tax relief on savings into registered pension schemes by either or both of:

1. Relief at Source: the pension provider claims 20% tax relief on the employee’s behalf from the government; or,
2. Net Pay: an employee’s salary is reduced before tax is deducted to give full tax relief at an employee’s marginal rate.

With either method, basic rate taxpayers receive relief immediately. For higher and additional rate taxpayers, the benefits for income tax are one of timing. It is possible to get a full relief by filing a tax return, but an employee will need to wait until after the tax year ends before they can file.

Salary sacrifice arrangements mean that the employer pays a sum into the pension scheme instead of and equal to the employee contribution (this is in addition to any employer contribution that it was already making). All employer contributions are tax-free to the same extent as any employee contribution. So, while there are no income tax savings to be made, salary sacrifice simplifies the process for obtaining the tax relief as no application for relief needs is required (this is likely to benefit higher rate taxpayers the most).  Where contributions are made in successive years, tax relief may be given by adjusting the employee’s tax code, so higher and additional rate tax payers would receive relief based on estimated contributions immediately.“

To read more about who benefits from salary sacrifice and how exactly it works, read the full article from Abbiss Cadres here.