Sacrifice salary for pension contributions - save tax and national insurance contributions

We are increasingly seeing clients using salary sacrifice arrangements to pay pension contributions in order to make tax and national insurance savings. Salary sacrifice is a voluntary arrangement where an employee agrees to give up part of their salary in exchange for a “benefit” – in a pensions context, this is their employer making an equivalent contribution to their pension scheme.  

Salary sacrifice reduces the employee’s pay, resulting in national insurance contributions savings for both employers and employees. The employer then pays the sacrificed sum into the pension scheme as an employer contribution and the employee does not have to pay any income tax on this, subject to certain HMRC annual limits. The employer is also eligible for corporation tax relief on the contribution.  

The concept is relatively simple, but in order to work legally, employers need to document the salary sacrifice correctly and ensure that the arrangement satisfies HMRC conditions. 

Employers should also take advice on other areas where salary sacrifice might impact pay, including for employees who are on periods of maternity/paternity leave (where entitlement to statutory payments depends on the level of pay).

If you would like to discuss any of these issues in more detail, or would like to discuss pension matters generally, then please contact Andrew Campbell, Head of Pensions, in the first instance.