Points to watch out for!

Salary Sacrifice can be a popular device to reduce the cost of pension contributions. The reduction is achieved by avoiding paying NI contributions on the part of pay that would be paid in employee pension contributions.

Essentially, it involves employees’ salaries being reduced by the amount of their pension contributions and those contributions instead being paid directly by the employer.

In 2023/24 employees pay NI at the rate of 12% of their gross pay between £242.01 to £967 a week (£1048.01 to £4189 a month), and 2% on their gross pay above that level.  This means that for most employees the saving they make is worth 12% of the value of their pension contribution and the benefit would appear in the form of higher take-home pay. For those on high pay the saving would be only 2% of the value of their contribution. The employer also makes a saving generally worth 13.8% of the employees’ pension contribution, whatever the employees’ salary level.

While salary sacrifice is generally advantageous, safeguards need to be built into schemes to avoid obvious sources of disadvantage to wider pay and pension calculations. Also members’ gains may be compromised by lower state benefits.


Careful account needs to be taken of all pay-related benefits to ensure they are not reduced by the salary sacrifice e.g. items like overtime, shift etc. may be calculated by reference to the basic rate.  The best way of dealing with these is for it to be established that they will continue to be calculated, both immediately and in the future, by reference to what salary would have been had the salary sacrifice not taken place. In practice this is often done by using a notional ‘reference salary’ for calculating the benefits.

Where members are in defined benefit pension schemes, where the amount of pension is defined by reference to final salary, then a similar safeguard needs to be introduced. Otherwise there could be a big impact both on the value of past and future service pension entitlements. Future pay rises should always be determined by reference to the pre-sacrifice salary level.

If your employer is providing you with life cover, this is usually worked out as a multiple of your salary. Your employer may provide less life cover if you sacrifice some of your salary. Members should encourage employers do provide life cover at your original salary, so you don’t lose out.

What about state benefits?

Lower earnings might affect your State Pension or contribution-based state benefits. Your employer should be able to tell you whether or not you will be affected in this way.

Sacrificing part of your salary means you earn less. This might affect maternity pay or mortgage applications. Employers can provide a letter of comfort to help mortgage applicants.

Employees on low pay should be excluded from salary sacrifice for two reasons. The new State Pension could be affected if the salary reduction dropped a members earnings below the NI threshold (or the Lower Earnings Limit, which is currently £6396 p.a. 2022/23). In a similar vein a salary sacrifice would not be allowed if it took members pay below the National Minimum Wage.

General considerations

Salary sacrifice needs to be properly communicated if it is to gain employee support.

It can be introduced either by members being invited to opt-in or by employees being included but advised of an option to opt-out. While the latter strategy may be pressed to overcome member inertia and suspicion it should not excuse the employer from properly communicating the scheme. Where any proposal is introduced it would be expected that it is accompanied by clear information as to who might stand to lose as well as who might stand to gain.

While the gain from NI savings may be similar for employees and the employer, employees may lose out from reduced State benefits. This should support suggestions that part of the employers’ savings should be channelled back in some sort of benefit for employees e.g. to offset a part of a contribution increase in a defined benefit scheme or to provide a supplement to the employer contribution in a defined contribution scheme.

Salary sacrifice has spread rapidly in private sector pension schemes. It is not an option for employees in public service schemes, as the Government does not allow it.

Our experience has been that, while members are often sceptical about salary sacrifice when it is proposed, we do not get complaints after it had been introduced. On the basis of that we do not object where employers suggest opting members in, provided that we have not identified any problem with what has been proposed.