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        Updated: April 15, 2024

        Salary Sacrifice Pension Schemes Explained

        In this guide we take a look at the benefits and potential downsides of salary sacrifice pensions for UK employees.

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        Want to put more into your pension? Salary sacrifice could be for you.

        Salary sacrifice schemes (also known as ‘salary exchange’ schemes) are an increasingly popular option for employees looking to maximise their pension contributions.

        We’ve built up a good bank of knowledge on the pros and potential pitfalls of this type of pension, and the advisors we work with will be happy to help you decide whether it would be a good option for you.

        In this article, we’ll cover the basics of salary sacrifice as well as answering some frequently asked questions, including:

        What is the definition of a salary sacrifice scheme?

        A salary sacrifice pension scheme is an arrangement between you and your employer in which you agree to give up a certain amount of your salary in exchange for certain non-cash benefits.

        These can include a range of ‘in kind’ benefits such as childcare vouchers, bikes, ultra-low emissions vehicles or periods of annual leave, but in this case, they take the form of payments into your pension.

        How does a salary sacrifice pension work?

        Once you’ve agreed with your employer how much of your salary you wish to ‘sacrifice’, your take-home pay is effectively reduced by that amount, so you’ll pay less income tax and National Insurance (NI) on your earnings, too.

        Your employer benefits from this arrangement because they’ll also pay less in NI, and you’ll benefit because there is more money available to go towards your pension that would usually go to the taxman.

        You should be able to choose how much of your salary to exchange for pension payments, with the option to adjust the amount – however employers may have their own rules on when you can do this, so you’ll need to ask your HR or your pensions administrator how flexible they can be on this point. You should be able to opt out of the scheme at any time.

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        Salary sacrifice pension example

        On a salary of £25,000 (£20,000 after tax), suppose you currently put 5% or £1,250 (£1,000 + £250 tax relief at 20%) into your pension each year, and your employer contributes 3% resulting in a total of £2,000 into your pension each year.

        The following example outlines what could change if you were to switch to a typical salary sacrifice arrangement – the figures will of course vary depending on how much you want to reduce your salary, as well as the extent of your employer’s contribution:

        • You agree with your employer that you will reduce your annual salary by £1,000, resulting in a gross annual salary of £24,000, or £19,200 after tax.
        • This is equivalent to around £70 per month in take-home pay for a basic rate taxpayer.
        • Your 5% pension contribution is thus reduced from £1,250 to £1,200 (£960 + £240 tax relief).
        • Your employer’s 3% contribution stays in place, PLUS the £1,000 you have sacrificed from your annual salary.
        • This results in total annual pension contributions of £2,920, which is £920 more into your pension each year than you’d receive without salary sacrifice.

        There are several salary sacrifice calculators available online that allow you to make a similar illustration for your own earnings. These figures will always be approximate and we recommend you speak to an expert for a more accurate picture.

        Is pension salary sacrifice the right retirement option for me?

        While it usually results in more generous pension contributions from your employer, salary sacrifice doesn’t suit everyone, and we recommend you seek independent financial advice to be sure that it’s the best option for you. Call us on 0808 189 0463 or make an online enquiry if you’d like to talk this through with one of the pensions experts on our books.

        An obvious downside is that you’ll have less take-home pay each month, so if you’re already struggling to pay the bills, it may not be for you. And if your salary is close to the minimum wage threshold, you may not qualify for salary sacrifice as all, as it’s illegal for your employer to pay you any less.

        You will also need to take into account how salary sacrifice affects your lifetime pension contributions towards the state pension, since this is based on earnings throughout your career.

        Tax credits

        However, reducing your salary in some cases means you’ll be eligible for certain state benefits or tax credits, which could be helpful if your salary is on the lower side but is still safely clear of this threshold. Speak to an expert to find out where you stand on this point.

        Speak to an expert on Salary Sacrifice pensions

        If you want to find out more about the possible benefits or risks of joining a salary sacrifice pension scheme or have any further questions about salary sacrifice and pensions, the specialist advisors we work with will be delighted to answer any queries you may have.

        Call us on 0808 189 0463 or make an enquiry online, and we’ll be in touch soon to discuss your requirements, free of charge and with no obligations on your part.


        The decision of whether to offer salary sacrifice is up to the employer, but depending on their level of knowledge, your employer may not be aware of the benefits available to them.

        If you are keen to switch to a salary sacrifice arrangement and this isn’t already being offered, it may be worth making the suggestion at your workplace. Official advice for UK employers on how to set up a salary sacrifice scheme is available on the government’s website.

        As the name suggests you need to be taking a salary to benefit from any form of salary sacrifice, so this is not possible if you operate as a sole trader.

        If you pay yourself through your own limited company however, you’re in control of how much of your earnings you put into your pension compared to how much you take in salary, provided you stay within the annual allowance.

        If you have reduced your earnings through salary sacrifice, your Statutory Maternity Pay will be calculated based on this (lower) figure. Any contractual maternity pay may or may not be affected, depending on your employer’s policy.

        Both employers and employees are obliged to continue paying pension contributions during paid maternity leave, including under salary sacrifice arrangements. The situation is a bit more complicated if you take extended, unpaid leave however, so we recommend you seek expert advice if you plan to do so.

        Since National Insurance (NI) is predicated on how much you earn, salary sacrifice will reduce the amount of NI you pay. This will have an income on various state benefits you may be entitled to, so if your contributions are low, you may want to factor this into your decision on whether to take salary sacrifice.

        The State Pension is one benefit that could be affected by lowering your earnings via salary sacrifice, however this should only be a problem if your reduced salary falls below the threshold needed to make NI contributions.

        No, there should not be any fees or additional ‘costs’ to you as an employee when joining a salary sacrifice scheme, other than the amount you agree to reduce your pay by.

        Leaving a salary sacrifice scheme is always an option, and you should be able to do so without penalty if the arrangement isn’t working for you. Your employer may have rules around when you can do this based on your contract, however they can’t make you stay in one. Your employer also cannot force you to enter into one.

        Since it results in lower contributions from employers and employees, HMRC has understandably taken an interest in salary sacrifice in the past and has tightened some of its rules around it. However it currently does not treat it as tax avoidance.

        It’s worth remembering that this could change at any time and these benefits may not always be available in their current form.

        Employers must consult with staff on whether or not they wish to join a salary sacrifice scheme, so it’s highly unlikely you’d be unaware of having enrolled in one. If you’re still unsure, speak to your HR or pensions administrator.

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        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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        Tony Stevens

        Tony Stevens

        Finance Expert

        About the author

        Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

        Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

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