Salary sacrifice, also known as ‘salary exchange’, is an arrangement between you and your employees where they agree to reduce their salary by the amount they want to contribute to their pension. You, as their employer, then pay this amount, plus their contribution to their pension savings.

There are two ways you could do this. Either you can add 0% as the employee contribution percentage and show the total percentage as the employer contribution percentage, or you can provide the contribution percentages split between the employee and yourselves.

The main benefit is that you and your employees will pay less in National Insurance Contributions (NICs) and income tax. These savings will increase either your employees’ pension contribution or their take-home pay, depending on the basis of your scheme.

Their reduced salary could affect the amount of money they are able to borrow from a mortgage provider. Their entitlements to state benefits, such as Statutory Maternity Pay, may also be affected.

As an employer, you should provide your employees with an overview of how salary sacrifice might affect them and whether you’re paying some or all NICS you save into their Smart Pension accounts.

Additionally, as your salary is reduced, there is the possibility that you may be in a favourable position when it comes to child benefit.

Javid earns £30,000 a year, sacrifices 5% of his salary to his pension, which equates to £1,500 a year. His employer contributes 3% of his salary to his pension, which equates to £900 a year.

Javid’s employer sets up the salary sacrifice arrangement, where all of the National Insurance Contribution (NIC) savings are retained by Javid and the employer. These savings are not added to Javid’s pension.

In the two examples below, we compare the difference between Javid’s salary, pension contribution and tax position before and after using salary sacrifice.

*Assumptions - Tax allowance full personal UK (excl. Scotland & Wales) 2026/27 - £12,570, with 20% tax rate applied. Employee National Insurance Primary threshold £9,568, with 12% NI rate applied. Employer National Insurance Secondary threshold £8,840, with 13.8% NI rate applied. To find out more about how we worked this calculation out, email [email protected]

Before salary sacrifice

After salary sacrifice

Samantha earns £30,000 a year, sacrifices 5% of her salary to her pension, which equates to £1,500 a year. Her employer contributes 3% of his salary to her pension, which equates to £900 a year.

Samantha’s employer sets up the salary sacrifice arrangement, where all of Samantha’s and her employer’s NI savings are saved into her pension.

In the two examples below, we compare the difference between Samantha’s salary, pension contribution and tax position before and after using salary sacrifice.

*Assumptions - Tax allowance full personal UK (excl. Scotland & Wales) 2026/27 - £12,570, with 20% tax rate applied. Employee National Insurance Primary threshold £9,568, with 12% NI rate applied. Employer National Insurance Secondary threshold £8,840, with 13.8% NI rate applied. To find out more about how we worked this calculation out, email [email protected]

Before salary sacrifice

After salary sacrifice

Please note: these examples have been provided for illustration purposes only. The benefits of using salary sacrifice will vary depending on your salary, location, current tax rates and what options your employer offers.

*This is 10.3% of the reduced salary but 9.7% of the original salary of £30,000.

Please refer to the contributions and payroll section of the Employer support articles, on the help centre, for assistance in viewing and managing contributions.

There is also salary sacrifice guidance available for your employees, in the Member support section of the help centre, under My contributions.