With the Government recently announcing an increase to employer NIC contributions at Budget 2024, effective from 6 April 2025 now is the time to consider changes to current Pension Salary Sacrifice arrangements, as well as introducing it for the first time if you have not done so already.
Experience shows that higher and additional rate taxpayers eligible to claim income tax relief through their Self-Assessment tax returns often fail to do so.
By simply changing the method by which pension contributions are made, significant savings for both the employer and employees can be achieved, while significantly simplifying how tax relief is granted for employees. For employees, therefore, participation in Pension Salary Sacrifice can result in a welcome boost to their take-home pay each month.
What is Pension Salary Sacrifice?
Pension Salary Sacrifice (also referred to as Pension Salary Exchange or Smart Pensions) is an income tax/NIC efficient and Auto-Enrolment compliant arrangement that can be used for pension contributions to reduce both the employee’s and employer’s NICs liabilities whilst ensuring income tax relief is received at source (ie via the payroll) for participating employees. The NIC savings are made on each payroll cycle, and the arrangement can be applied to the majority of workplace pension schemes.
How it works
An employee agrees to a reduction in their contractual pay equivalent to the amount of their gross pension contribution. In return, the employer makes an additional employer’s pension contribution to the pension plan equivalent to the level of the sacrifice to the employee’s contractual pay, in addition to their regular employer pension contribution. As a result, the participating employee and the employer now pay NICs on the employee’s adjusted pay after the salary sacrifice. Employers currently pay NICs on an employee’s salary at 13.8%, (rising to 15% from 6 April 2025) and employees currently pay NIC at 8% (on earnings of up to c.£50,000) or 2% (on earnings over c.£50,000). Pay reviews and any salary-related benefits can, however, continue to be based on the original level of salary, prior to the salary sacrifice adjustment.
Implementing salary sacrifice
Implementing Pension Salary Sacrifice requires an effective change in employees’ terms and conditions of employment. This can be achieved without the requirement to issue new contracts of employment or side letters. However, employers need to be able to demonstrate that employees fully understand and consent to the change, for it to be valid.
It's therefore vital that the approach taken to document and enact the change is introduced and applied correctly and that payroll teams fully understand the changes.
Virtually all payroll software packages have functionality to accommodate Pension Salary Sacrifice. In addition, HMRC guidance supports the introduction of Pension Salary Sacrifice and they do not require employers introducing such arrangements to approach them for clearance.
Historically, the implementation of Pension Salary Sacrifice often saw businesses seeking consent from employees, however, it is now more commonly implemented through ‘negative affirmation’ which speeds up the process and increases take up, often to around 95%. Current arrangements may also benefit from adopting this approach to maximise take-up by new joiners and at the next enrolment window for current pension member employees.
Learn more about how our Employee benefits services can help you
Example of savings
The following illustrations provide an indication of the annual NICs and Apprenticeship Levy savings available. It shows, based on salaries of £25,000, £40,000 and £60,000 per annum and pension contributions of 5%, the savings that can be generated by participating in Pension Salary Sacrifice.
For example, for an employer with 150 employees on an average salary of £25,000, would potentially save over £29,000 per annum for the business based on NIC rates from 6 April 2025.
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Contribution Amount Per Annum
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Contribution Amount Per Annum
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Contribution Amount Per Annum
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* Calculated as Employee’s NIC Rate x contribution amount, per annum
** Calculated at Employer NIC rate of 13.8%/15% (pre/post 6 April 2025) plus Apprenticeship Levy of 0.5% (for large employers) x contribution amount, per annum. Where employers are not liable to the Apprenticeship Levy, estimated savings would be 0.5% less.
Next steps
Employers may be searching for ways to improve and enhance their benefits offering without incurring additional costs. Pension Salary Sacrifice can be a much-welcomed benefit for employees and can help to create a budget for additional new benefits, or mitigate increased employment costs. Pension Salary Sacrifice may not be right for all employees, particularly the lower paid, which is why it's crucial to take advice regarding the suitability for your workforce.
We can help advise employers on how best to implement Pension Salary Sacrifice arrangements for the first time as well as to review current arrangements to ensure they are optimised fully, the scheme rules and documentation remain up to date, and schemes are fully compliant and effective for tax/NIC purposes. Our approach ensures that what can be seen as a complex concept is presented clearly and concisely, both for employees to help them make a fully informed decision, as well as all stakeholders within a business. Mistakes in this area can be time-consuming and expensive to correct, so we’d always encourage employers to reach out if they have any concerns.
We can also help explore which other Salary Sacrifice benefits, such as holiday trading, or Cycle to Work, could form a key part of your wider employee reward package.
