How salary sacrifice can help your business and your employees save more

Workplace pensions is never the sexiest subject, is it?

The Autumn Budget didn’t help either.

A rare headline appearance in the news with the announcement that from April 2029, the Government will cap the amount of pension contributions that are exempt from National Insurance via salary sacrifice.

Despite not (theoretically) coming into effect until 2029, the announcement still brought about a lot of negative press, which, as a minimum, is unhelpful at a time when many people are battling cost of living pressures and feeling unable to save for retirement. In fact, one in ten are opting-out of their workplace pension scheme altogether. [1]

However, the reality is that salary sacrifice remains one of the most effective tools available for helping employees save for their retirement. Simultaneously, it is also a smart and simple way to help employers mitigate rising business costs.

In this blog, we look to strip back some of the negativity and explain what salary sacrifice is, how it can save money for both employers and employees, and why an increasing number of UK SMEs are missing out on these benefits.

At its core, salary sacrifice (also known as salary exchange) is an agreement between an employer and employee where the employee agrees to give up part of their gross salary (before tax) in return for a non-cash benefit – most commonly a pension contribution.

Because the employee’s gross income is reduced by the sacrificed amount, both employer and employee pay less in National Insurance Contributions (NICs). This makes it one of the most tax-efficient ways to boost pension savings as well as save a business significant National Insurance costs.

Employers in the UK currently pay Class 1 employer NICs at 15% on an employee’s earnings above the secondary threshold (currently £5,000).

By introducing a salary sacrifice arrangement, the employer’s NIC liability reduces because the employee’s gross salary (used to calculate NICs) is lower. This can translate into substantial savings – particularly for businesses with large payrolls.

For example:

• An employer with an average salary of £30,000 and a standard pension contribution rate could save £225 per employee annually in NICs simply by implementing salary sacrifice. [2]

Employers can also save on corporation tax by utilising salary sacrifice. This is because pension contributions can be considered an allowable business expense and count against a company’s taxable profits. As a result, they lower the business’s corporation tax liability.

These savings can be reinvested back into your business – whether that’s enhancing employee benefits, funding growth initiatives, or improving your pension offering to attract top talent.

For your workforce, salary sacrifice isn’t just about pensions – it’s about take-home pay too. By sacrificing part of their gross salary, employees pay less in National Insurance and income tax on that portion of their earnings, which boosts their net pay or pension savings.

Take a typical employee earning £30,000 and contributing 5% to their pension:

• Without salary sacrifice, the employee would pay higher NICs and take home slightly less.
• With salary sacrifice, their gross salary used for NIC calculations drops, lowering the NIC bill and potentially increasing their take-home pay by around £120 a year. [2]

For many employees, particularly those feeling the pinch from cost-of-living pressures, this added efficiency in pension saving and improved net pay can make a meaningful difference.

Despite clear advantages, research shows that a large number of UK SMEs haven’t adopted salary sacrifice schemes. According to Howden Group’s research:

• Only 29% of SMEs currently use salary sacrifice for pensions.

68% of SME businesses are missing out on potential savings that collectively could exceed £2.7bn in employer NIC savings and £1.8bn in employee savings across the UK. [3]

Let’s look at a practical illustration:

• Take an employee earning £38,000 annually.
• By entering into a salary sacrifice arrangement, both employer and employee reduce NICs.
• The salary sacrifice agreement could boost pension contributions by around 7.5% and take-home pay by 0.5% – all funded through lower NICs.4
• All of this comes at no extra cost to the employer.

For employers with many staff, even modest per-person savings quickly scale into significant financial advantages that can be reinvested to grow the business or improve workplace benefits.

At a time when:

• National Insurance and other employment costs are rising
• Many employees struggle to save enough for retirement. Salary sacrifice offers a mutually beneficial solution:

• • Employers reduce NIC liabilities and can reinvest savings.
  • Employees enjoy lower taxes and NICs, better take-home pay, and higher pension contributions.

It’s a practical tool that can help combat shrinking take-home pay while encouraging long-term financial wellness – a priority as more workers feel financially stretched and under-saved for retirement.

So, back to the Budget.

From 2029, it’s important to remember that only the first £2,000 of pension contributions via salary sacrifice will be exempt from NICs. Contributions above this will be treated like other pension contributions for NIC purposes.

But this future change doesn’t eliminate the benefits of salary sacrifice now, but it does add urgency for employers to act early while full NIC advantages remain in place.

Howden’s research also found that 36% of SMEs are aware of salary sacrifice but have not explored it in detail, and 17% are not aware of it at all. 3

If this sounds like you, you can contact us for a no-obligation discussion about your options.

Implementing or optimising a salary sacrifice pension scheme doesn’t have to be daunting. We help UK businesses, especially SMEs, design and manage pension solutions that maximise tax efficiency, support employee wellbeing, and make financial sense for employers.

Speak to our team today to discuss how salary sacrifice could benefit your business, your people and start capturing savings that many of your peers are overlooking.

Contact WillU to explore workplace pensions that work harder for both you and your employees.