In the government’s Autumn Budget, chancellor Rachel Reeves announced the largest single increase in employer National Insurance contributions (NICs) for years.
From 6 April 2025, employer NICs will increase from 13.8% (2024/25) to 15%. Additionally, the salary threshold at which employers start paying NICs for an employee will fall from £9,100 to £5,000 a year.
As a result, while some business owners might benefit from the Employment Allowance, which may offset some of these costs, many could face a significant increase in their NICs.
This means that “salary sacrifice” is likely to become an increasingly valuable tool for employers looking to manage these rising costs.
Salary sacrifice allows both employers and employees to save on NICs. What’s more, as an employee, joining such a scheme could potentially increase both your pension savings and your take-home pay.
Read on to find out how salary sacrifice works and discover what the pros and cons of signing up for such a scheme could be for you as an employee.
Salary sacrifice could increase your take-home pay and make your pension savings more tax-efficient
Salary sacrifice is a government scheme offered by some employers in which you “sacrifice” a portion of your salary in exchange for other non-cash benefits. These might include childcare vouchers, a cycle to work scheme, private healthcare, or indeed pension contributions.
Taking a lower salary may not seem appealing at first glance, but it could allow you to increase your take-home pay, and it can be a tax-efficient way to save for your retirement.
This is because HMRC calculates the amount of Income Tax and NICs you pay based on your total salary before pension contributions are taken.
Yet, when you use salary sacrifice, you reduce your salary by an agreed amount, which your employer pays directly into your pension. Your Income Tax and NICs are then calculated based on your lower salary.
This could mean that your net pay increases even though your gross salary is lower.
For example, according to the Guardian, if you earn £35,000 a year and contribute 5% of your salary (£1,750) to your workplace pension, you would take home £27,319 after Income Tax and NI have been deducted.
On the other hand, if you used salary sacrifice to pay the same contribution, your pre-tax salary would fall to £33,250 (£5,000 minus your £1,750 pension contribution), but you would take home an additional £140 (£27,459).
This could be especially powerful if your salary is close to one of the Income Tax thresholds, as increasing your pension contributions through salary sacrifice could reduce your salary enough to move you into a lower tax bracket.
Additionally, if your salary falls, your employer will pay lower NICs too. While they are not obliged to do so, some employers may use this saving to increase their contributions to your pension.
Salary sacrifice might not be the right choice for everyone
As you can see, salary sacrifice could be a helpful way to increase both your take-home pay and your pension savings. Yet, it’s worth considering the potential downsides, before deciding if joining your employer’s scheme is the right choice for you.
A lower salary could affect the amount you’re eligible to borrow
Many lenders, such as mortgage providers, typically use your gross income as part of their assessment criteria for determining how much you can borrow from them.
As salary sacrifice reduces your pre-tax salary, this could affect how much some providers are willing to lend you.
Some lenders may consider your sacrificed salary in this calculation. But, this may not apply to all, so it’s important to bear this in mind before you sacrifice any salary.
Salary sacrifice could reduce your entitlement to employer and state benefits
Some employer benefits are calculated as a multiple of your salary. For example, if you have “death in service” benefits that pay out a tax-free lump sum to your beneficiaries if you die while working for your employer, a lower salary could mean that your family receives a smaller payout.
Your entitlement to certain state benefits might also be affected. For example, Statutory Sick Pay, Maternity Pay, and Paternity Pay are calculated based on your gross earnings.
If you opt out of your pension scheme you may not be able to get a refund of your contributions
If you use a salary sacrifice scheme, your pension contributions are paid directly by your employer. As such, these payments are treated as employer contributions.
This means that if you decide to leave your pension scheme, you might not be able to claim a refund of these contributions.
You’ll need to sign a new contract to take part in a salary sacrifice scheme
Your employee contract must accurately reflect your salary. As such, you’ll need to sign an updated contract if you join a salary sacrifice scheme.
As you can see, there may be advantages and downsides to joining such a scheme.
Your employer should clearly set out the terms and conditions of any salary sacrifice scheme they offer, but the balance of pros and cons is likely to depend on your unique circumstances and goals.
If you’re planning to take out a mortgage or have a child in the near future, maintaining your salary and entitlement to state benefits might be your priority.
Yet, if you have no such plans and building your retirement savings is your main goal, salary sacrifice might be a helpful option.
Get in touch
If you’re interested in finding out more about salary sacrifice and would like help deciding if it’s a good choice for you, we can help.
Please get in touch either by email at helpme@aspirellp.co.uk or by calling 0117 930 3510 to speak to an experienced and independent financial planner in Bristol.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
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