Are you looking for a way to save for retirement while also reducing your tax bill? Then salary sacrifice may be the answer for you. In this blog post, we will explain what salary sacrifice is, how it works, and the benefits and considerations of this scheme.
What is Salary Sacrifice?
Salary sacrifice is an arrangement between an employer and an employee in which the employee agrees to give up a portion of their salary in exchange for an equivalent contribution by the employer to their pension scheme. This arrangement can be an effective way to increase pension contributions while reducing the employee’s taxable income, resulting in lower tax bills.
How Does Salary Sacrifice Work?
Under a salary sacrifice arrangement, the employee’s taxable income is reduced by the amount of the sacrificed salary, which means that they pay less income tax.
The employer then contributes an amount equal to the sacrificed salary into the employee’s pension scheme. As you’re effectively earning a lower salary, both you and your employer pay lower National Insurance contributions (NICs), which often means your take-home pay will be higher. Better still, your employer might pay part or all their NIC saving into your pension too, although they don’t have to do this.
So, it could be a win-win for you and your employer!

Benefits of Salary Sacrifice
One of the main benefits of salary sacrifice is the potential tax savings it can provide. By reducing their taxable income, employees can pay less income tax and National Insurance contributions, even leaving them with more take-home pay, in some circumstances. Additionally, any increased pension contributions can help to boost retirement savings, ensuring a more comfortable retirement.
For more information, a good source is the Government’s MoneyHelper service. MoneyHelper brings together the support and services of three government-backed financial guidance providers: the Money Advice Service, the Pensions Advisory Service and Pension Wise.
Some Considerations
There are possible disadvantages that are important to consider:
- If your employer is providing you with life cover, this is usually worked out as a multiple of your salary. Your employer might provide less life cover if you sacrifice some of your salary. Your employer should tell you if any workplace life cover is based on your pay before or after the salary sacrifice deduction.
- If you’re in a defined benefit scheme and you leave it in the first two years, you might not be able to get a refund of your contributions. This is because any salary sacrifice contributions would count as employer contributions.
- If you’re in a defined contribution scheme, you can only get a refund of your contributions if you opt out of or leave the scheme within 30 days of joining it. As these contributions will be made by your employer, if you opt out or leave after 30 days – your pot will remain invested and you won’t be able to access the money until the age of 55 (57 from 2028).
- Your lower salary might affect the amount of money you’re able to borrow for a mortgage.
- Your entitlement to certain State benefits, such as Statutory Maternity Pay, might be affected.
So, if your employer offers a salary sacrifice arrangement, find out whether it’s right for you.
Your employer should give you an overview of how salary sacrifice might affect you and whether they would pay some or all of the NICs they save into your pension pot.
You can also ask your employer to calculate how salary sacrifice would affect your take home pay. You don’t have to go ahead with salary sacrifice if you don’t think you’ll benefit enough.
It’s important to note that salary sacrifice arrangements must be set up properly to ensure that they are compliant with HMRC rules and regulations. Employers and employees should seek professional advice before entering any such arrangement.
Additionally, employees should be aware that this arrangement may have an impact on their entitlement to certain state benefits, such as statutory maternity pay or tax credits.
In Conclusion
Salary sacrifice is a useful tool for employees looking to increase their pension contributions while reducing their tax bill. By sacrificing a portion of their salary, employees can effectively double their pension contributions, resulting in a more comfortable retirement. However, it’s important to seek professional advice before entering any such arrangement to ensure that it is set up correctly and complies with HMRC regulations.
As ever, whether it’s a good idea for you will depend on your personal circumstances. Contact me for professional advice at any time. Or check out some of my other pensions blog posts.
